Financial Constraints and Firm Adjustments During a Sales Disruption

We address two main questions: (i) how do firms respond to an unanticipated shock to their cash flows, and (ii) what is the role of financial constraints in mediating such response? To answer these questions, we study the behavior of Chilean firms during the 2019 social unrest, which caused a series of disruptions to the firms’ activity over several months. Exploiting quasi-experimental variation in the exposure of firms to these incidents, we find that more exposed firms experience larger declines in sales, larger employment losses, and are more likely to fall behind in their financial obligations than less affected firms. Moreover, these responses are significantly stronger for those firms more likely to be financially constrained. A back-of-the-envelope calculation suggests that constrained firms translate almost half the decline in sales into lower demand for labor and intermediate inputs, more than double the transmission of unconstrained firms.