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Title: The Economic Costs of Financial Distress

Author(s): Cláudia Custódio, Miguel Ferreira and Emilia Garcia-Appendini

Publication Date: July 2019

Keyword(s): Economic distress, financial distress, Real estate prices and Supply Chain

Programme Area(s): Financial Economics

Abstract: We estimate the economic costs of financial distress by exploiting cross-supplier variation in real estate assets and leverage, and the timing of real estate shocks. We show that for the same client buying from different suppliers, its purchases from suppliers in financial distress decline by an additional 10% following a drop in local real estate prices. The effect is more pronounced in more competitive industries, manufacturing and durable goods industries, for producers of less-specific goods, and when the costs of switching suppliers are low. Our results suggest that the indirect costs of financial distress are economically important.

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Bibliographic Reference

Custódio, C, Ferreira, M and Garcia-Appendini, E. 2019. 'The Economic Costs of Financial Distress'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13862