INVESTIGATING THE OPTIMAL EXIT TIMING AND LEVERAGE DURING THE COVID-19 CRISIS

Abstract

This paper investigates the effectiveness of corporate credit policies as a means of preventing market exit in the aftermath of the COVID-19 pandemic. A real options framework incorporating dynamic programming is employed to investigate the relationship between exit decisions, leverage ratio and productivity uncertainty. Our paper presents a novel approach to the exit problem in comparison to other attempts in early 2020. Taking into account the dynamics of firms, we allow for a variety of factors, such as productivity uncertainty, debt readjustment, liquidity constraints, and leverage level, to explain the optimal time for a firm to exit during the COVID-19 pandemic. Our results indicate that the corporate credit programs have a significant positive impact and suggest that a greater leverage ratio increases the likelihood of survival and delays the decision to exit.

Keywords

• uncertainty
• liquidity productivity
• debt
• real options