Indirect Costs of Financial Distress*

Cláudia Custódio, Miguel A Ferreira and Emilia Garcia-Appendini

Review of Finance, 2023, vol. 27, issue 6, 2233-2270

Abstract: We estimate the indirect costs of financial distress due to lost sales by exploiting real estate (RE) shocks and cross-supplier variation in RE assets and leverage. We show that for the same client buying from different suppliers, the client’s purchases from distressed suppliers decline by an additional 13% following a drop in local RE prices. The effect is more pronounced in more competitive industries, manufacturing, durable goods, less-specific goods, and when the costs of switching suppliers are low. Our results suggest that clients reduce their exposure to suppliers in financial distress.

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: 2023
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Working Paper: Indirect costs of financial distress (2022)
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