Working Paper: NBER ID: w16197
Authors: Ali Hortasu; Gregor Matvos; Chad Syverson; Sriram Venkataraman
Abstract: The financial decisions of durable goods makers can impose spillovers on their consumers. Namely, durable goods provide a consumption stream that frequently depends on services provided by the manufacturer (e.g., warranties, parts, and maintenance). Manufacturer bankruptcy, or even the possibility thereof, threatens this service provision and can substantially reduce the value of its products to their current owners. We test this hypothesis in one of the largest durable goods markets, automobiles, using data on millions of used cars sold at wholesale auctions around the U.S. during 2006-8. We find that an increase in an auto manufacturer's financial distress results in a contemporaneous drop in the prices of its cars at auction, controlling for a host of other influences on price. The estimated effects are statistically and economically significant. Furthermore, cars with longer expected service lives (those within manufacturer warranty, having lower mileage, or in better condition) see larger price declines than those with shorter remaining lives. These patterns do not seem to be driven solely by reduced demand from auto dealers affiliated with the troubled manufacturers or by contemporaneous declines in new car prices. Our estimates imply a potentially large indirect cost of financial distress on car manufacturers.
Keywords: financial distress; durable goods; automobile market; credit default swaps; warranty
JEL Codes: D4; G3; L1; L6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in financial distress (CDS spreads) (F65) | Decrease in used car prices (E31) |
| Increase in financial distress (CDS spreads) (F65) | Greater price decline for cars under warranty (R48) |
| Increase in financial distress (CDS spreads) (F65) | Greater price decline for lower mileage cars (R48) |
| Increase in financial distress (CDS spreads) (F65) | Greater price decline for cars in better condition (R48) |
| Financial distress (G33) | Reduced car values (J17) |