DP13862 The Economic Costs of Financial Distress

Author(s): Claudia Custodio, Miguel Ferreira, Emilia Garcia-Appendini
Publication Date: July 2019
Keyword(s): Economic distress, financial distress, Real estate prices, Supply Chain
JEL(s): G31, G32, G33, L11, L14
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13862

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.