Local Bankruptcy and Geographic Contagion in the Bank Loan Market

63 Pages Posted: 29 Jul 2015 Last revised: 21 Feb 2019

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

Alexandra Niessen-Ruenzi

University of Mannheim - Department of Finance

Date Written: February 18, 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 lender's liquidity constraints. Instead, the effect is more pronounced for informationally opaque bankruptcies and among lenders with limited local exposure. These results suggest that higher loan spreads among local firms are driven by lenders who have limited information on the local business environment, and thus require higher risk premia.

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, Local Bankruptcy and Geographic Contagion in the Bank Loan Market (February 18, 2019). Available at SSRN: https://ssrn.com/abstract=2637026 or http://dx.doi.org/10.2139/ssrn.2637026

Jawad M. Addoum

Cornell University ( email )

Ithaca, NY 14853
United States

Alok Kumar (Contact Author)

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

Australian National University ( email )

Canberra, Australian Capital Territory 2601
Australia

Alexandra Niessen-Ruenzi

University of Mannheim - Department of Finance ( email )

Mannheim, 68131
Germany

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