Indirect costs of financial distress

We estimate the economic costs of financial distress due to lost sales, 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, durable goods, less-specific goods, and when the costs of switching suppliers are low. Our results suggest that clients reduce their exposure to suppliers in financial distress.

Author: Cláudia Custódio, Miguel A, Ferreira, Emilia Garcia-Appendini
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Number of pages: 79
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