The effects of financial distress: Evidence from US GDP growth

John Nkwoma Inekwe*, Yi Jin, Ma Rebecca Valenzuela

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

9 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)8-21
Number of pages14
JournalEconomic Modelling
Volume72
DOIs
Publication statusPublished - Jun 2018

Keywords

  • Financial distress
  • Growth
  • Risk

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