Firm Exit and Liquidity: Evidence from the Great Recession
September 23, 2024
Summary
The authors of this working paper introduce evidence from the Great Recession that the firms most likely to shut down were those in financial distress, and—once that factor has been accounted for—age, size, and productivity are relatively unimportant.
View PaperWorking Paper 2024-13
Abstract: This paper studies the role of credit constraints in accounting for the dynamics of firm exit during the Great Recession. We present novel firm-level evidence on the role of credit constraints on exit behavior during the Great Recession. Firms in financial distress, with tighter access to credit, are more likely to default than firms with more access to credit. This difference widened substantially in the Great Recession while, in contrast, default rates did not vary much by size, age, or productivity. We identify conditions under which standard models of firms subject to financial frictions can be consistent with these facts.
JEL classification: E32, G01
Key words: firm exit, Great Recession, credit constraints, financial distress
Digital Object Identifier (DOI): https://doi.org/10.29338/wp2024-13
The authors thank Matthew Famiglietti for excellent research assistance. They thank Kenneth Perez (Walls & Associates LLC) for his assistance with the data. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Fernando Leibovici, Federal Reserve Bank of St. Louis, or David Wiczer, Federal Reserve Bank of Atlanta and IZA.
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