The Economic Costs of Financial Distress
81 Pages Posted: 8 Jan 2019 Last revised: 20 May 2020
Date Written: November 20, 2019
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
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