Coronavirus: Equity instead of credit financing

International team of financial economists proposes outright cash transfers to firms combined with a temporary, elevated corporate profit tax

Financial economists from Germany, Italy, the Netherlands and the US demand to support small and medium-sized enterprises in the corona crisis not by credit but by forms of equity financing. The experts around the Leibniz Institute for Financial Research SAFE propose to combine outright cash transfers to firms with a temporary, elevated corporate profit tax for this purpose.

The implied equity-like payment structure would reduce the debt burden of affected companies. If implemented at the European level, for example through a European Pandemic Equity Fund (EPEF), the stability of banks and the financial system of the euro zone would increase by preventing further distortions across European member states, the experts write in a new policy paper. The authors include Arnoud Boot (University of Amsterdam), Elena Carletti (Bocconi University), Hans-Helmut Kotz (Harvard Center for European Studies and SAFE), Jan Pieter Krahnen (SAFE), Loriana Pelizzon (Goethe University Frankfurt and SAFE), and Marti Subrahmanyam (New York University, Stern Business School).

In particular, small and medium-sized enterprises need financial aid desperately. The financial economists, therefore, suggest to provide financial aid for companies without access to the capital market by exchanging cash payments for a temporary corporate tax increase – using existing networks of national entities. Increasing the corporate tax for a predefined number of years would allow European member states to participate in the successes of a recovering European economy. Such an implementation would not only create a common understanding of responsibility and solidarity in Europe, but also lead to all countries succeed jointly from a new economic upturn.

SAFE Policy Letter No.81: Corona and Financial Stability 3.0: Try equity - risk sharing for companies, large and small

SAFE Polic Letter No.79: Corona and Financial Stability 2.0: Act jointly now, but also think about tomorrow

SAFE Policy Letter No.78: The Coronavirus and Financial Stability