The Economic Costs of Financial Distress

81 Pages Posted: 8 Jan 2019 Last revised: 20 May 2020

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

Multiple version iconThere are 2 versions of this paper

Date Written: November 20, 2019

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 distressed suppliers decline by an additional 10% following a drop in real estate prices. The effect is more pronounced in more competitive industries, manufacturing and durable goods industries, for less-specific goods, and when the costs of switching suppliers are low. Our results suggest that the indirect costs of financial distress are driven mostly by clients reducing their purchases from distressed suppliers.

Keywords: Financial Distress, Economic Distress, Real Estate Shocks, Supply Chain

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 20, 2019). 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 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 Campolide
Lisbon, 1099-032
Portugal

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 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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