The Economic Costs of Financial Distress

Custódio, Cláudia, Miguel Ferreira and Emilia Garcia-Appendini
Authors registered in the RePEc Author Service: Claudia Custodio

No 13862, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Financial distress; Economic distress; Real estate prices; Supply chain (search for similar items in EconPapers)
JEL-codes: G31 G32 G33 L11 L14 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-ure
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