Review of Finance Vol. 27 No. 6 2023

Indirect Costs of Financial Distress

Cláudia Custódio^1,2,3; Miguel A. Ferreira^2,3,4; Emilia Garcia-Appendini^5,6

¹ Imperial College Business School , South Kensington Campus , London, SW7 2AZ, · ² ECGI , Brussels, · ³ CEPR , London, · ⁴ Nova School of Business and Economics , R. da Holanda 1 , Carcavelos, 2775-405, · ⁵ Norges Bank , Bankplassen 2. PB 1179 , Oslo, NO-0107. · ⁶ University of Zurich , Rämistrasse 71 , Zurich, 8006,

Abstract

We estimate the indirect costs of financial distress due to lost sales by exploiting real estate (RE) shocks and cross-supplier variation in RE assets and leverage. We show that for the same client buying from different suppliers, the client’s purchases from distressed suppliers decline by an additional 13% following a drop in local RE 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.

DOI

10.1093/rof/rfad014

Volume

27

Issue

6

Pages

2233-2270

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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