Intra‐Industry Bankruptcy Contagion: Evidence from the Pricing of Industry Recovery Rates

32 Pages Posted: 19 May 2020

See all articles by Yuanchen Chang

Yuanchen Chang

National Chengchi University - College of Commerce

Yi‐Ting Hsieh

Feng Chia University

Wenchien Liu

Chung Yuan Christian University - Department of Finance

Peter Miu

McMaster University - DeGroote School of Business

Date Written: March 2020

Abstract

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

Chang, Yuanchen and Hsieh, Yi‐Ting and Liu, Wenchien and Miu, Peter, Intra‐Industry Bankruptcy Contagion: Evidence from the Pricing of Industry Recovery Rates (March 2020). European Financial Management, Vol. 26, Issue 2, pp. 503-534, 2020, Available at SSRN: https://ssrn.com/abstract=3600290 or http://dx.doi.org/10.1111/eufm.12217

Yuanchen Chang (Contact Author)

National Chengchi University - College of Commerce ( email )

Taiwan
886229393091-81102 (Phone)
886229393394 (Fax)

Yi‐Ting Hsieh

Feng Chia University

100 Wenhwa Road
Talchung
Taiwan

Wenchien Liu

Chung Yuan Christian University - Department of Finance ( email )

200 Chung Pei Rd
Chung Li City, 32023
Taiwan

Peter Miu

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905-525-9140 ext 23981 (Phone)

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