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Indirect Costs of Financial Distress in Durable Goods Industries: The Case of Auto Manufacturers

Ali Hortaçsu¹; Gregor Matvos¹; Chad Syverson¹; Sriram Venkataraman²

¹ University of Chicago · ² UNC Kenan-Flagler Business School

Financial distress can disrupt a durable goods producer's provision of complementary goods and services such as warranties, spare parts and maintenance. This reduces consumers' demand for the core product, causing indirect costs of financial distress. We test this hypothesis in the market for used cars sold at wholesale auctions. An increase in a manufacturer's credit default swaps significantly decreases the prices of its cars at auction, especially cars with longer expected service lives. Our estimates imply substantial indirect costs of financial distress for car manufacturers. These costs have occasionally even exceeded the tax savings benefits for General Motors and Ford.

DOI

10.1093/rfs/hht006

Volume

26 (5)

Pages

1248-1290

Language

en

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BibTeX

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