Winning Back Customers: Financial Constraints and Recovery from Recessions

Abstract

How do financial constraints impact firms' ability to recover sales after recessions? Financial constraints could cause temporary downturns to have lasting effects if they prevent firms from winning back customers when the economy recovers. Leveraging a French reform as a financing shock, we find that, following the 2008-9 global trade collapse, financially constrained firms export significantly less even years after the recession as they are less likely to regain customers lost during the trade collapse. Financially constrained firms recover fewer customers because they compete less aggressively on quality, suggesting that customers face lower switching costs after trade interruptions.

Keywords: financial constraints, product quality, international trade, customer capital, business cycle

JEL Classification: L14, L15, G32, E32