Fernando Leibovici and David Wiczer
Working Paper 2024-13
September 2024

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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

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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