Real Effects of Financial Distress: The Role of Heterogeneity
Sudipto Karmakar and
Working Papers from Banco de Portugal, Economics and Research Department
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)
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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:ptu:wpaper:w201806
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