Real Effects of Financial Distress

The Role of Heterogeneity

Bibliographic Data

ID9714800
AuthorsFrancisco Buera (Washington University in St. Louis), Sudipto Karmakar (0000-0003-2992-1092, Bank of England, corresponding author)
Year2022
Volume132
Issue644
Pages1309-1348
Publication date2022-05-09
Open AccessYes
TypeARTICLE
VenueThe Economic Journal (JOURNAL)
Journal identifiersISSN: 0013-0133 • E-ISSN: 1468-0297
PublisherOxford University Press (PUBLISHER • GB)
DOI10.1093/ej/ueab083
OpenAlexW3121156328
LanguageEN
References cited21

Which firms are more sensitive to an aggregate financial shock? What can be learnt from these heterogeneous responses? We evaluate and answer these questions from both empirical and theoretical perspectives. Using microdata from Portugal during the sovereign debt crisis we find that highly leveraged firms and firms with a larger share of short-term debt on their balance sheets contracted more in the aftermath of the financial shock. We analyse the conditions under which leverage and debt maturity determine the sensitivity of firms’ investment decisions to financial shocks in standard models of investment under financial frictions. In doing so, we extend these models to feature a maturity choice. We show that simple versions of these models are not consistent with the observed heterogeneous responses. The model needs the presence of frictions when issuing long-term debt to rationalise the empirical findings

Debt · Dynamic stochastic general equilibrium · Economics · Financial accelerator · Financial crisis · Financial distress · Financial economics · Financial system · Leverage (statistics · Macroeconomics · Maturity (psychological · Microdata (statistics · Monetary economics · Monetary policy · Shock (circulatory · Banking stability, regulation, efficiency · Finance · Global Financial Crisis and Policies · Monetary Policy and Economic Impact

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