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The effects of financial distress: Evidence from US GDP growth

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  • Inekwe, John Nkwoma
  • Jin, Yi
  • Valenzuela, Ma. Rebecca

Abstract

This study provides a dynamic characterization of the link between financial distress risk and the real economy. Using a large dataset of firm-level observations, new ex-ante measures of financial distress are developed at the sector level and used to examine growth trends in the US economy. More specifically, we develop a comprehensive set-up for predicting ex-ante financial distress risk, then examine the effects of ex-ante financial distress risk on GDP growth. Our results show that over the period of 1970–2012, ex-ante financial distress risk contracts GDP growth by up to 9 per cent. The results also reveal greater contractions in exports and investment. The results remain unchanged when internal and external instruments are used to address endogeneity issues.

Suggested Citation

  • Inekwe, John Nkwoma & Jin, Yi & Valenzuela, Ma. Rebecca, 2018. "The effects of financial distress: Evidence from US GDP growth," Economic Modelling, Elsevier, vol. 72(C), pages 8-21.
  • Handle: RePEc:eee:ecmode:v:72:y:2018:i:c:p:8-21
    DOI: 10.1016/j.econmod.2018.01.001
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    Keywords

    Financial distress; Risk; Growth;

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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