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

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  • Ali Hortaçsu
  • Gregor Matvos
  • Chad Syverson
  • Sriram Venkataraman

Abstract

The financial decisions of durable goods makers can impose spillovers on their consumers. Namely, durable goods provide a consumption stream that frequently depends on services provided by the manufacturer (e.g., warranties, parts, and maintenance). Manufacturer bankruptcy, or even the possibility thereof, threatens this service provision and can substantially reduce the value of its products to their current owners. We test this hypothesis in one of the largest durable goods markets, automobiles, using data on 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 results 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 imply a potentially large indirect cost of financial distress on car manufacturers.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16197.

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Date of creation: Jul 2010
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Publication status: published as \Indirect Costs of Financial Distress in Durable Goods Industries: The Case of Auto Manufacturers," with Gregor Matvos, Chad Syverson and Sriram Venkataraman, Review of Financial Studies , v. 26, no.5, 2013, pp. 1248-1290.
Handle: RePEc:nbr:nberwo:16197

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  1. Gregor Andrade & Steven N. Kaplan, 1998. "How Costly is Financial (Not Economic) Distress? Evidence from Highly Leveraged Transactions that Became Distressed," Journal of Finance, American Finance Association, vol. 53(5), pages 1443-1493, October.
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  4. Meghan R. Busse & Christopher R. Knittel & Florian Zettelmeyer, 2009. "Pain at the Pump: The Differential Effect of Gasoline Prices on New and Used Automobile Markets," NBER Working Papers 15590, National Bureau of Economic Research, Inc.
  5. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc.
  6. John R. Graham, 2000. "How Big Are the Tax Benefits of Debt?," Journal of Finance, American Finance Association, vol. 55(5), pages 1901-1941, October.
  7. Chevalier, Judith A & Scharfstein, David S, 1996. "Capital-Market Imperfections and Countercyclical Markups: Theory and Evidence," American Economic Review, American Economic Association, vol. 86(4), pages 703-25, September.
  8. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
  9. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
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Cited by:
  1. Ali Hortacsu & Gregor Matvos & Chaehee Shin & Chad Syverson & Sriram Venkataraman, 2011. "Is an Automaker's Road to Bankruptcy Paved with Customers' Beliefs?," American Economic Review, American Economic Association, vol. 101(3), pages 93-97, May.
  2. Rogers, Robert P., 2013. "Bankruptcy and steel plant shutdowns," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(2), pages 165-174.

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