Adaptation to Shocks and the Role of Capital Structure: Danish Exporters during the Cartoon Crisis
This paper uses the Cartoon Crisis in Denmark to study how firms' responses to an unexpected demand shock vary with their capital structure. Using detailed firm data on financial statements, trade, product innovation, and outsourcing of Danish exporters, we exploit variation in capital structure and exposure to Muslim countries to analyze the effect of leverage on firms’ responses in input and output markets. We find low-leverage firms increase investment, introduce new products and redirect sales elsewhere. High-leverage firms reduce sales and investment, and substitute employees with outsourcing. These short-term cost savings suggest indirect costs of financial distress away from bankruptcy.
Benjamin Friedrich, Michal Zator
Friedrich, Benjamin, and Michal Zator. 2018. Adaptation to Shocks and the Role of Capital Structure: Danish Exporters during the Cartoon Crisis.