Bankruptcy and the Collateral Channel

Efraim Benmelech and Nittai K. Bergman

No 15708, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Do bankrupt firms impose negative externalities on their non-bankrupt competitors? We propose and analyze a collateral channel in which a firm's bankruptcy reduces collateral values of other industry participants, thereby increasing the cost of external debt finance industry wide. To identify this collateral channel, we use a novel dataset of secured debt tranches issued by U.S. airlines which includes a detailed description of the underlying assets serving as collateral. Our estimates suggest that industry bankruptcies have a sizeable impact on the cost of debt financing of other industry participants. We discuss how the collateral channel may lead to contagion effects which amplify the business cycle during industry downturns.

JEL-codes: E32 E44 G01 G12 G33 L93 (search for similar items in EconPapers)
Date: 2010-01
New Economics Papers: this item is included in nep-bec and nep-mac
Note: AP CF IO ME
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Published as Efraim Benmelech & Nittai K. Bergman, 2011. "Bankruptcy and the Collateral Channel," Journal of Finance, American Finance Association, vol. 66(2), pages 337-378, 04.

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Journal Article: Bankruptcy and the Collateral Channel (2011)
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