Pandemic exposure, credit market reactions, and corporate default risk

We examine the effect of firm-level pandemic exposure on corporate default risk. Using five-year single-name credit default swap (CDS) spreads and CDS-implied probabilities of default (PD) as measures of default risk, we find that firm-level pandemic exposure significantly increases subsequent corporate default risk. CDS decomposition further reveals that the increase in CDS spreads is primarily attributable to the default component rather than the liquidity component. Moreover, pandemic exposure flattens the CDS term structure, indicating a more pronounced short-term effect. We further show that fiscal policy interventions significantly moderate pandemic-related default risk.