Local Bankruptcy and Geographic Contagion in the Bank Loan Market

Review of Finance, Volume 24, Issue 5, September 2020, Pages 997–1037

60 Pages Posted: 29 Jul 2015 Last revised: 14 Oct 2020

See all articles by Jawad M. Addoum

Jawad M. Addoum

Cornell SC Johnson College of Business

Alok Kumar

University of Miami - Miami Herbert Business School

Nhan Le

Australian National University

Alexandra Niessen-Ruenzi

University of Mannheim, Department of Finance; University of Mannheim - Department of Finance

Date Written: October 8, 2019

Abstract

We examine whether corporate bankruptcies influence bank loan characteristics of geographically proximate firms. Controlling for industry contagion and local economic conditions, firms headquartered near a bankruptcy event experience a seven basis point increase in loan spreads. The effect is transitory and cannot be fully explained by local correlated information or lenders' financial health. Instead, the effect is more pronounced for informationally opaque bankruptcies and borrowers, and weakened among loans with relationship lenders and lenders with significant local presence.

Keywords: Corporate bankruptcy, geographic contagion, bank loans

JEL Classification: G21, G33, E51

Suggested Citation

Addoum, Jawad M. and Kumar, Alok and Le, Nhan and Niessen-Ruenzi, Alexandra and Niessen-Ruenzi, Alexandra, Local Bankruptcy and Geographic Contagion in the Bank Loan Market (October 8, 2019). Review of Finance, Volume 24, Issue 5, September 2020, Pages 997–1037, Available at SSRN: https://ssrn.com/abstract=2637026 or http://dx.doi.org/10.2139/ssrn.2637026

Jawad M. Addoum

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

Alok Kumar (Contact Author)

University of Miami - Miami Herbert Business School ( email )

517B Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://sites.google.com/view/alokmiami/home

Nhan Le

Australian National University ( email )

26C Kingsley Street
Acton, Australian Capital Territory 2601
Australia

HOME PAGE: http://https://sites.google.com/a/colorado.edu/nhan-le/

Alexandra Niessen-Ruenzi

University of Mannheim - Department of Finance ( email )

Mannheim, 68131
Germany

University of Mannheim, Department of Finance ( email )

L9, 1-2
Mannheim, 68131
Germany
+49 621 181 1595 (Phone)

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