Are Consumers Affected by Durable Goods Makers’ Financial Distress? The Case of Auto Manufacturers

Theory suggests the financial decisions of durable goods makers can impose spillovers on their consumers. Namely, the consumption stream that durable goods provide frequently depends on services provided by the manufacturer itself (e.g., warranties, spare parts availability, maintenance and upgrades). Manufacturer bankruptcy, or even the possibility thereof, threatens this service provision and as a result can substantially reduce the value of its products to their current owners. We test whether this hypothesis holds in one of the largest durable goods markets, automobiles. We use data on prices of millions of used cars sold at wholesale auctions around the U.S. during 2006-8. We find that an increase in an auto manufacturer’s financial distress (as measured by an increase in its CDS spread) does result in a contemporaneous drop in the prices of its cars at auction, controlling for a host of other influences on price. The estimated effects are statistically and economically significant. Furthermore, cars with longer expected service lives (those within manufacturer warranty, having lower mileage, or in better condition) see larger price declines than those with shorter remaining lives. These patterns do not seem to be driven solely by reduced demand from auto dealers affiliated with the troubled manufacturers or by contemporaneous declines in new car prices. Our estimates also imply a potentially large indirect cost of financial distress on car manufacturers. + We thank Judith Chevalier, Alessandro Gavazza and the participants of the Chicago Booth finance seminar and the NBER Industrial Organization and Corporate Finance meetings for comments and feedback. ∗ Contact information: Hortaçsu: Department of Economics, University of Chicago, 1126 E. 59 St., Chicago, IL 60637.; Matvos and Syverson: University of Chicago Booth School of Business, 5807 S. Woodlawn Ave., Chicago, IL 60637; Venkataraman: Goizueta Business School, Emory University, 1300 Clifton Road NE, Atlanta, Georgia 30322.