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The effects of financial distress: Evidence from US GDP growth

John Inekwe (), Yi Jin and Ma. Rebecca Valenzuela

Economic Modelling, 2018, vol. 72, issue C, 8-21

Abstract: This study provides a dynamic characterization of the link between financial distress risk and the real economy. Using a large dataset of firm-level observations, new ex-ante measures of financial distress are developed at the sector level and used to examine growth trends in the US economy. More specifically, we develop a comprehensive set-up for predicting ex-ante financial distress risk, then examine the effects of ex-ante financial distress risk on GDP growth. Our results show that over the period of 1970–2012, ex-ante financial distress risk contracts GDP growth by up to 9 per cent. The results also reveal greater contractions in exports and investment. The results remain unchanged when internal and external instruments are used to address endogeneity issues.

Keywords: Financial distress; Risk; Growth (search for similar items in EconPapers)
JEL-codes: E23 E44 O16 (search for similar items in EconPapers)
Date: 2018
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