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Indirect Costs of Financial Distress in Durable Goods Industries: The Case of Auto Manufacturers

Ali Hortacsu, Gregor Matvos, Chad Syverson and Sriram Venkataraman

Review of Financial Studies, 2013, vol. 26, issue 5, 1248-1290

Abstract: Financial distress can disrupt a durable goods producer's provision of complementary goods and services such as warranties, spare parts and maintenance. This reduces consumers' demand for the core product, causing indirect costs of financial distress. We test this hypothesis in the market for used cars sold at wholesale auctions. An increase in a manufacturer's credit default swaps significantly decreases the prices of its cars at auction, especially cars with longer expected service lives. Our estimates imply substantial indirect costs of financial distress for car manufacturers. These costs have occasionally even exceeded the tax savings benefits for General Motors and Ford. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Date: 2013
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