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.