Industry Structure and Ripple Effects of Bankruptcy Announcements

Louis T W Cheng and James E McDonald

The Financial Review, 1996, vol. 31, issue 4, 783-807

Abstract: The market structure of an industry plays an important role in determining the stock market performance of surviving firms during intra-industry bankruptcy announcements. On evaluating the announcement effects of a survivor sample from each of two industries with very different market structures, namely the airline industry and the railroad industry, we find that the airline sample received significant abnormal returns (positive ripple) while the railroad sample experiences significant abnormal losses (negative ripple). Furthermore, the differences of the abnormal returns from the two samples also are statistically significant. These findings demonstrate support for the market structure hypothesis (MSH), but cast doubt on the contagion effect hypothesis (CEH). Copyright 1996 by MIT Press.

Date: 1996
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