Working Paper: CEPR ID: DP13862
Authors: Claudia Custodio; Miguel Ferreira; Emilia Garcia Appendini
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 suppliers in financial distress decline by an additional 10% following a drop in local real estate prices. The effect is more pronounced in more competitive industries, manufacturing and durable goods industries, for producers of less-specific goods, and when the costs of switching suppliers are low. Our results suggest that the indirect costs of financial distress are economically important.
Keywords: financial distress; economic distress; real estate prices; supply chain
JEL Codes: G31; G32; G33; L11; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial distress (G33) | Purchases from suppliers (L14) |
| Drop in local real estate prices (R31) | Financial distress (G33) |
| Financial distress (G33) | Sales (L81) |
| Financial distress (G33) | Indirect costs (J32) |
| Real estate shocks (R31) | Financial distress (G33) |
| Financial distress (G33) | Sales in competitive industries (L11) |
| Financial distress (G33) | Sales for durable goods (L68) |