Peer Financial Distress and Individual Leverage

Review of Financial Studies, Forthcoming

71 Pages Posted: 27 Jun 2019 Last revised: 24 Jul 2019

See all articles by Ankit Kalda

Ankit Kalda

Indiana University - Kelley School of Business - Department of Finance

Date Written: May 15, 2019

Abstract

Using health shocks to identify financial distress situations, I document that peer distress leads to a decline in individual leverage and debt on average. Individual leverage declines by 5.7% and remains deflated for at least five years following peer distress. This decline occurs as individuals borrow less on the intensive margin, pay higher fractions of their debt and save more while their income remains unchanged following peer distress. As a result, individuals are less likely to default during the period following peer distress. The heterogeneity in responses highlight the role of changes in beliefs and preferences as the underlying mechanism.

Keywords: Leverage, Borrowing Decisions, Household Debt, Beliefs, Preferences

JEL Classification: D12, D14, D84, H31, R20

Suggested Citation

Kalda, Ankit, Peer Financial Distress and Individual Leverage (May 15, 2019). Review of Financial Studies, Forthcoming . Available at SSRN: https://ssrn.com/abstract=3406906 or http://dx.doi.org/10.2139/ssrn.3406906

Ankit Kalda (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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