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Product Market Interactions and the Propensity to Restructure in Bankruptcy

54 Pages Posted: 22 Oct 2011 Last revised: 18 Apr 2012

Nina Baranchuk

University of Texas at Dallas - Naveen Jindal School of Management

Michael J. Rebello

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: October 21, 2011

Abstract

In this paper we model the spillovers from the restructuring of a financially distressed firm on other firms and the feedback effects from the restructuring. Our results indicate that the spillover and feedback effects are complex and are determined by several factors including the level of information asymmetry regarding the restructuring firm, its direct bankruptcy cost, bankruptcy's effect on its competitiveness, and the nature of its economic linkages with the other firms. For example, when the information asymmetry about a firm's prospects is sufficiently high, its bankruptcy can lower both its competitor's stock price and the probability that the competitor will restructure in bankruptcy, while raising the price of its competitor's debt. A sufficiently large decline in the level of information asymmetry can cause these price and bankruptcy probability effects to reverse. Switching from competitive to a customer-supplier relationship also reverses the price and bankruptcy probability spillover effects.

Keywords: restructuring, distress, spillover, feedback

JEL Classification: G33

Suggested Citation

Baranchuk, Nina and Rebello, Michael J., Product Market Interactions and the Propensity to Restructure in Bankruptcy (October 21, 2011). Available at SSRN: https://ssrn.com/abstract=1947377 or http://dx.doi.org/10.2139/ssrn.1947377

Nina Baranchuk (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Michael J. Rebello

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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