Lending lessons from defaults: adjustments in borrowing behavior after peer defaults

Xiaofang Xu, Aner Zhou, Jie He and Zhengfei Lu

The European Journal of Finance, 2025, vol. 31, issue 11, 1445-1468

Abstract: This paper examines whether companies adjust their borrowing behavior after peer defaults. Once aware of peer defaults, firms have incentives to reduce their borrowing amounts, and banks have incentives to tighten their credit supplies, to prevent potential defaults. Using data from publicly listed firms in China between 2003 and 2018, we find a significant reduction in short-term bank loans by firms in the year after an industry peer default.The reduction in bank loans is more pronounced for firms with stronger reputations and a higher level of market attention, and is weaker for firms with limited borrowing ability, as measured by higher leverage and lower profitability. In addition, the results remain robust after controlling for local credit supply and market sentiment. There is also evidence that firms reduce capital expenditures following a peer default. Collectively, these findings are consistent with the idea that firms actively cut back on borrowing in response to peer defaults. Overall, our findings underscore the importance of improving the transparency and visibility of corporate default information.

Date: 2025
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DOI: 10.1080/1351847X.2025.2502569

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