COVID-19 exposure, financial flexibility, and corporate leverage adjustment☆ ☆

This study examines how firm-level exposure to the COVID-19 pandemic affects the speed of leverage adjustment among 3260 US-listed firms from 2019q1 to 2022q1. Using a novel measure of COVID-19 exposure, we find that higher exposure significantly reduces the speed at which firms adjust their leverage towards target levels. This effect is more pronounced for financially constrained firms and those operating in competitive markets. We further show that COVID19 exposure adversely impacts corporate liquidity, default risk, and financial flexibility. Our findings highlight the role of exogenous shocks in shaping corporate financing decisions.