Abstract
What are the real effects of forced sales of corporate securities? Our theoretical analysis shows that model uncertainty can generate distorted negative (positive) capital investment effects during price declines (reversals) in equilibrium when there is information feedback from financial markets. Empirically, we find that forced sales of corporate bonds by financial institutions had a significant negative impact on the capital investment and product market competitiveness — measured by market shares and price-cost margins — of exposed firms during the financial crisis. These adverse real effects on exposed firms were also vertically transmitted to their suppliers and customers.
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