The Economic Costs of Financial Distress

62 Pages Posted: 8 Jan 2019

See all articles by Claudia Custodio

Claudia Custodio

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Miguel A. Ferreira

Nova School of Business and Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Emilia Garcia-Appendini

University of Zurich - Department of Banking and Finance

Date Written: November 18, 2018

Abstract

We estimate the economic costs of financial distress using local real estate shocks. We identify these effects by exploiting variation in real estate assets and financial leverage across suppliers. We find that clients reduce their reliance on suppliers that are highly levered and own more real estate assets in response to declines in real estate prices. More affected suppliers suffer a 10% larger decline in sales for the same client and year than less affected suppliers. The effect is more pronounced in more competitive industries, for durable and less specific goods, and when switching costs are low. Our results suggest that indirect costs of financial distress are economically important.

Keywords: Financial Distress, Economic Distress, Real Estate Shocks

JEL Classification: G31, G32, G33, L11, L14

Suggested Citation

Custodio, Claudia and Ferreira, Miguel Almeida and Garcia-Appendini, Emilia, The Economic Costs of Financial Distress (November 18, 2018). Available at SSRN: https://ssrn.com/abstract=3310941 or http://dx.doi.org/10.2139/ssrn.3310941

Claudia Custodio

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Miguel Almeida Ferreira (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Emilia Garcia-Appendini

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

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