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 CDS 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. ∗ Corresponding author: Gregor Matvos, University of Chicago Booth School of Business, 5807 S. Woodlawn Ave., Chicago, IL 60637,email: [email protected], tel.: 773 834 3188; Hortaçsu: Department of Economics, University of Chicago, 1126 E. 59 St., Chicago, IL 60637.; Syverson: University of Chicago Booth School of Business, 5807 S. Woodlawn Ave., Chicago, IL 60637; Venkataraman: UNC Kenan-Flagler Business School, McCall 4520, Chapel Hill, NC 27599. 1