Download This PaperIndirect Costs of Financial Distress
79 Pages Posted: 8 Jan 2019 Last revised: 25 Oct 2022
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Indirect Costs of Financial Distress
Indirect Costs of Financial Distress
The Economic Costs of Financial Distress
Date Written: October 13, 2022
Abstract
We estimate the indirect costs of financial distress due to lost sales by exploiting real estate
shocks and cross-supplier variation in real estate 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 real estate 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 Shocks, Supply Chain
JEL Classification: G31, G32, G33, L11, L14
Suggested Citation: Suggested Citation
European Corporate Governance Institute (ECGI) ( email )
c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium
Miguel Almeida Ferreira (Contact Author)
Nova School of Business and Economics ( email )
Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal
European Corporate Governance Institute (ECGI) ( email )
c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium