Local Bankruptcy and Geographic Contagion in the Bank Loan Market
60 Pages Posted: 29 Jul 2015 Last revised: 9 Oct 2019
Date Written: October 8, 2019
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: Suggested Citation