How Deadly Is Financial Leverage? Evidence from Care Homes During the COVID-19 Crisis

Once information about leasing and corporate structure is incorporated into the way financial leverage is calculated, highly leveraged care homes are found to have a death rate twice as high as that of non-leveraged care homes before the government provided financial support (i.e., during the first wave). Highly leveraged care homes cut costs more aggressively and experienced the largest drop in cash reserves. Care homes controlled by private equity firms no longer display higher COVID-19 death rates once their significantly higher leverage is controlled for. Our results illustrate the importance of accurately measuring financial flexibility and the negative externalities caused by high leverage.

This paper was accepted by Bo Becker, finance.

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.02923.