Abstract

http://ssrn.com/abstract=940630
 
 

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Does Industry-Wide Distress Affect Defaulted Firms? Evidence from Creditor Recoveries


Viral V. Acharya


New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Sreedhar T. Bharath


Arizona State University - W.P. Carey School of Business

Anand Srinivasan


National University of Singapore - Department of Finance


Journal of Financial Economics 85 (2007) 787–821.

Abstract:     
Using data on defaulted firms in the United States over the period 1982 to 1999, we show that creditors of defaulted firms recover significantly lower amounts in present-value terms when the industry of defaulted firms is in distress. We investigate whether this is purely an economic-downturn effect or also a fire-sales effect along the lines of Shleifer and Vishny (1992). We find the fire-sales effect to be also at work: Creditors recover less if the industry is in distress and non-defaulted firms in the industry are illiquid, particularly if the industry is characterized by assets that are specific, that is, not easily redeployable by other industries, and if the debt is collateralized by such specific assets. The interaction effect of industry-level distress and asset-specificity is strongest for senior unsecured creditors, is economically significant, and robust to contract-specific, firm-specific, macroeconomic, and bond-market supply effects. We also document that defaulted firms in distressed industries are more likely to emerge as restructured firms than to be acquired or liquidated, and spend longer in bankruptcy.

Keywords: Recovery, Default, Credit risk, Distressed securities, Bankruptcy

JEL Classification: G33, G34, G12

Accepted Paper Series





Not Available For Download

Date posted: October 28, 2006  

Suggested Citation

Acharya, Viral V. and Bharath, Sreedhar T. and Srinivasan, Anand, Does Industry-Wide Distress Affect Defaulted Firms? Evidence from Creditor Recoveries. Journal of Financial Economics 85 (2007) 787–821.. Available at SSRN: http://ssrn.com/abstract=940630

Contact Information

Viral V. Acharya (Contact Author)
New York University - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
New York University (NYU) - Department of Finance
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
Sreedhar T. Bharath
Arizona State University - W.P. Carey School of Business ( email )
400 E. Lemon Street
Tempe, AZ 85287
United States
347-256-8784 (Phone)
Anand Srinivasan
National University of Singapore - Department of Finance ( email )
Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore
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