Real effects of financial distress : the role of heterogeneity

Buera, Francisco; Karmakar, Sudipto

http://hdl.handle.net/10400.5/16017

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Authors

Buera, Francisco

Karmakar, Sudipto

Abstract(s)

What are the heterogeneous e_ects of _nancial shocks on _rms' behavior? This paper evaluates and answers this question from both an empirical and a theoretical perspective. Using micro data from Portugal during the sovereign debt crisis, starting in 2010, we document that highly leveraged _rms and _rms that had a larger share of short-term debt on their balance sheets contracted more in the aftermath of a _nancial shock. We use a standard model to analyze the conditions under which leverage and debt maturity determine the sensitivity of _rms' investment decisions to _nancial shocks. We show that the presence of long-term investment projects and frictions to the issuance of long-term debt are needed for the model to rationalize the empirical _ndings. We conclude that the di_erential responses of _rms to a _nancial shock do not provide unambiguous information to identify these shocks. Rather, we argue that this information should be use to test for the relevance of important model assumptions.

URI

http://hdl.handle.net/10400.5/16017

Citation

Buera, Francisco e Sudipto Karmakar (2018). "Real effects of financial distress : the role of heterogeneity". Instituto Superior de Economia e Gestão – REM Working paper nº 036 - 2018