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Flexibility Costs of Debt: Danish Exporters During the Cartoon Crisis


We study how firms respond to an unexpected demand shock, exploiting the 2006 boycott of Danish products after publication of Muhammad caricatures. On average, affected firms lose the majority of their exports to Muslim countries and experience a significant decrease in total sales, but are able to compensate for half of boycott-induced losses by increasing sales elsewhere. The average response, however, hides substantial heterogeneity by firms' capital structure. Low-leverage firms fully offset the effect of the boycott, as they enter new markets and introduce new products, facilitating this expansion by an increase in investment and borrowing. In contrast, high-leverage firms do not substantially expand in other markets, see a significant decline in sales, and reduce employment. Our results highlight the importance of operational and financial flexibility, consistent with declarations of practitioners.


Working Paper


Benjamin Friedrich, Michal Zator

Date Published



Friedrich, Benjamin, and Michal Zator. 2021. Flexibility Costs of Debt: Danish Exporters During the Cartoon Crisis.


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