Indirect costs of financial distress in durable goods Industries: The case of auto manufacturers

Ali Hortaçsu, Gregor Matvos*, Chad Syverson, Sriram Venkataraman

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

28 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)1248-1290
Number of pages43
JournalReview of Financial Studies
Volume26
Issue number5
DOIs
StatePublished - May 2013

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Indirect costs of financial distress in durable goods Industries: The case of auto manufacturers'. Together they form a unique fingerprint.

Cite this