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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2022 Annual Theme: Stakeholder Capitalism
Market-Based Solutions to Vital Economic Issues
May 1, 2013

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


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.


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