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Idiosyncratic Shocks and Industry Contagion: Evidence from a Quasi-experiment

Emilia Garcia-Appendini ()

No 1410, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: I analyze whether the higher financing costs following the idiosyncratic bankruptcy or default of one firm affect the real investment decisions of non-distressed competitors. Results show that firms which are more affected by the higher financing costs (“treated firms”) reduce investment by around 10% more than their less vulnerable peers. These results are not driven by industry downturns that coincide with the bankruptcies or defaults, nor are they caused by higher refinancing risk or forward-looking managers of treated firms. Results suggest that idiosyncratic shocks can be transmitted to peers through an asymmetric information channel, but not through a collateral channel.

Keywords: Corporate investment; contagion; bankruptcy; distress; market structure; isiosyncratic shocks (search for similar items in EconPapers)
JEL-codes: G31 G32 G33 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2014-06, Revised 2015-03
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