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The Economic Costs of Financial Distress

Author

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  • Custódio, Cláudia
  • Ferreira, Miguel
  • Garcia-Appendini, Emilia

Abstract

We estimate the economic costs of financial distress by exploiting cross-supplier variation in real estate assets and leverage, and the timing of real estate shocks. We show that for the same client buying from different suppliers, its purchases from suppliers in financial distress decline by an additional 10% following a drop in local real estate prices. The effect is more pronounced in more competitive industries, manufacturing and durable goods industries, for producers of less-specific goods, and when the costs of switching suppliers are low. Our results suggest that the indirect costs of financial distress are economically important.

Suggested Citation

  • Custódio, Cláudia & Ferreira, Miguel & Garcia-Appendini, Emilia, 2019. "The Economic Costs of Financial Distress," CEPR Discussion Papers 13862, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13862
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    More about this item

    Keywords

    Financial distress; Economic distress; Real estate prices; Supply chain;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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