Economic Crises and Their Impact on Corporate Performance: Firm-level Evidence from Indian Manufacturing

Abstract: This study examines the firm-level impacts of two economic crises on Indian manufacturing, viz., the economic crisis generated following the Global Financial Crisis of 2007-08 and the economic crisis generated due to demonetization in November 2016, followed by the emergence of Covid-19 in March 2020. The impacts on the two alternative measures of firm performance, viz., Tobin’s q and ROA are observed to be different. Moreover, the impacts are quite different in the two crisis periods, for both Tobin’s q and ROA. We observe that capital intensity, competition, leverage, and firm size are highly significant determinants of firm survival and recovery. Capital-intensive firms experience less contraction during Crisis 1 for Tobin’s q. Firms with high pre-crisis capital intensity experienced smaller drops in firm performance. However, we get the opposite result for Tobin’s q during Crisis 2. But for ROA, again, capital intensity has a significantly negative effect during Crisis 1. More competition among firms helps to recover early. Thus, more competition helped more reallocation from less productive to more productive firms during Crisis 1 and Crisis 2 for Tobin’s q. A similar result was observed for ROA during Crisis 1, too. Thus, both Crisis 1 and Crisis 2 resulted in “creative destruction” in India, as argued by Schumpeter (1942). Highly leveraged firms experience more contraction during a crisis, for Tobin’s q, in both Crisis 1 and Crisis 2. A similar result was observed for ROA during Crisis 2 as well. Moreover, we observe that smaller firms are more adaptable in times of Crisis 2 for Tobin’s q. Thus, larger farms were hit harder by Crisis 2, and economic activity was reallocated toward more productive firms during Crisis 2. A similar result was observed for ROA for the period of Crisis 2. This finding highlights that Crisis 2 did not reallocate activity to large firms that have greater market power or political connections, which could be harmful to long-run economic growth (Di Mauro and Syverson, 2020). Ownership patterns of firms did not play any role in experiencing the effects of the crisis. Moreover, unlike earlier studies, export orientation and firm age played no role in this context in India. Thus, a unique, targeted public policy will not help firms’ survival during an economic crisis.

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