Contagious Negative Sentiment and Corporate Policies: Evidence from Local Bankruptcy Filings

47 Pages Posted: 4 Sep 2014

See all articles by Jawad M. Addoum

Jawad M. Addoum

Cornell University

Alok Kumar

University of Miami - School of Business Administration

Nhan Le

Australian National University

Date Written: August 28, 2014

Abstract

This study shows that corporate bankruptcy events affect the investment and financing policies of geographically proximate firms. Following the bankruptcy of a local peer, non-filing local firms significantly reduce investment expenditures, reduce capital structure leverage, and hold more cash. The effects of local bankruptcy are more pronounced when the CEO of the filing firm is dismissed, and stronger among firms managed by CEOs who are relatively young, have fewer qualifications, and relatively short tenure. Firms that have board connections with the bankrupt firms also react more strongly to the distress events. Importantly, the spillover effects associated with geographic proximity cannot be explained by intra-industry or supply chain effects documented in the extant literature. We also find that the effects cannot be explained by shocks to the local economy. Collectively, these results suggest that corporate managers follow the availability heuristic and become overly conservative in their investment and financial policies in response to local distress events.

Keywords: Local bankruptcy, Corporate policies

JEL Classification: G32, G33

Suggested Citation

Addoum, Jawad M. and Kumar, Alok and Le, Nhan, Contagious Negative Sentiment and Corporate Policies: Evidence from Local Bankruptcy Filings (August 28, 2014). Paris December 2014 Finance Meeting EUROFIDAI - AFFI Paper. Available at SSRN: https://ssrn.com/abstract=2490742 or http://dx.doi.org/10.2139/ssrn.2490742

Jawad M. Addoum

Cornell University ( email )

Ithaca, NY 14853
United States

Alok Kumar

University of Miami - School of Business Administration ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

Nhan Le (Contact Author)

Australian National University ( email )

Canberra, Australian Capital Territory 2601
Australia

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