Real Effects of Financial Distress: The Role of Heterogeneity

Francisco Buera and Sudipto Karmakar

No 2018/36, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: What are the heterogeneous effects of financial shocks on firms' behavior? This paper evaluates and answers this question from both an empirical and a theoretical perspective. Using micro data from Portugal during the sovereign debt crisis, starting in 2010, we document that highly leveraged firms and firms that had a larger share of short-term debt on their balance sheets contracted more in the aftermath of a financial shock. We use a standard model to analyze the conditions under which leverage and debt maturity determine the sensitivity of firms' investment decisions to financial shocks. We show that the presence of long-term investment projects and frictions to the issuance of long-term debt are needed for the model to rationalize the empirical findings. We conclude that the differential responses of firms to a financial shock do not provide unambiguous information to identify these shocks. Rather, we argue that this information should be use to test for the relevance of important model assumptions.

JEL-codes: E44 F34 G12 H63 (search for similar items in EconPapers)
Date: 2018-04
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (11)

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Related works:
Journal Article: Real Effects of Financial Distress: The Role of Heterogeneity (2022)
Working Paper: Real effects of financial distress: the role of heterogeneity (2019)
Working Paper: Real Effects of Financial Distress: The Role of Heterogeneity (2018)
Working Paper: Real Effects of Financial Distress: The Role of Heterogeneity (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ise:remwps:wp0362018

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