Local Bankruptcy and Geographic Contagion in the Bank Loan Market
63 Pages Posted: 29 Jul 2015 Last revised: 21 Feb 2019
Date Written: February 18, 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 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: Suggested Citation