Intra‐Industry Bankruptcy Contagion: Evidence from the Pricing of Industry Recovery Rates
32 Pages Posted: 19 May 2020
Date Written: March 2020
How does bankruptcy contagion propagate among industry peers? We study the debt recovery channel of industry contagion by examining whether the cost of a company's debt is affected by the observed recovery rates of its bankrupt industry peers. Our results show that lower industry recovery rates are associated with higher loan spreads, but only when the contracts were originated during industry bankruptcy waves. Consistent with the debt recovery channel of industry contagion, we find that the negative effects of industry recovery rates are significantly stronger under situations where the effect is expected to be more salient.
Keywords: debt recovery channel, industry contagion, loan pricing, recovery rate
JEL Classification: G30, G33
Suggested Citation: Suggested Citation