Financial Firm Bankruptcy and Contagion

54 Pages Posted: 15 Mar 2012 Last revised: 1 Aug 2012

See all articles by Jean Helwege

Jean Helwege

UC Riverside

Gaiyan Zhang

University of Missouri at St. Louis - College of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: July 31, 2012

Abstract

The Lehman bankruptcy highlights the potential for interconnectedness among financial firms to cause a financial crisis. Previous research shows that Chapter 11 filings cause significant negative externalities, consistent with a strong role for counterparty contagion. However, the effects may also arise from information contagion, where one firm’s default or news of distress leads investors to update their valuations of related securities. We examine bankrupt and distressed financial firms to evaluate the roles of counterparty contagion and information contagion and find that both forms have significant effects on other firms’ stock returns. While significant, both information contagion and counterparty contagion effects are modest for most financial firm bankruptcies. Low counterparty risk likely reflects the fact that many financial firms are required by regulators to hold diversified portfolios.

Keywords: Banks, counterparty contagion, information contagion, bankruptcy

JEL Classification: G21, G24, G28, G32, G33, E44, E58, E61

Suggested Citation

Helwege, Jean and Zhang, Gaiyan, Financial Firm Bankruptcy and Contagion (July 31, 2012). Available at SSRN: https://ssrn.com/abstract=2020776 or http://dx.doi.org/10.2139/ssrn.2020776

Jean Helwege (Contact Author)

UC Riverside ( email )

900 University Ave.
Anderson Hall
Riverside, CA 92521
United States
9518274284 (Phone)

Gaiyan Zhang

University of Missouri at St. Louis - College of Business Administration ( email )

One University Blvd
St. Louis, MO 63121
United States

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