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Bankruptcy and the Collateral Channel

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  • Efraim Benmelech
  • Nittai K. Bergman

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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15708.

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Date of creation: Jan 2010
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Publication status: 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.
Handle: RePEc:nbr:nberwo:15708

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  1. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, American Economic Association, vol. 73(3), pages 257-76, June.
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  3. Benmelech, Efraim & Bergman, Nittai K., 2009. "Collateral pricing," Journal of Financial Economics, Elsevier, Elsevier, vol. 91(3), pages 339-360, March.
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  12. Efraim Benmelech & Nittai K. Bergman, 2008. "Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from U.S. Airlines," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 123(4), pages 1635-1677, November.
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Cited by:
  1. Garcia-Appendini, Emilia, . "The Real Costs of Industry Contagion," Working Papers on Finance 1410, University of St. Gallen, School of Finance.
  2. Marcin Jaskowski & Michael McAleer, 2012. "Estimating implied recovery rates from the term structure of CDS spreads," KIER Working Papers 836, Kyoto University, Institute of Economic Research.
  3. Hertzel, Michael G. & Officer, Micah S., 2012. "Industry contagion in loan spreads," Journal of Financial Economics, Elsevier, Elsevier, vol. 103(3), pages 493-506.
  4. Saldías, Martín, 2013. "A market-based approach to sector risk determinants and transmission in the euro area," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(11), pages 4534-4555.
  5. Anton Korinek, 2011. "The New Economics of Capital Controls Imposed for Prudential Reasons+L4888," IMF Working Papers 11/298, International Monetary Fund.
  6. Gordon M. Phillips & Giorgo Sertsios, 2011. "How Do Firm Financial Conditions Affect Product Quality and Pricing?," NBER Working Papers 17233, National Bureau of Economic Research, Inc.
  7. repec:dgr:uvatin:2013005 is not listed on IDEAS
  8. Elmas Yaldiz Hanedar & Eleonora Broccardo & Flavio Bazzana, 2012. "Collateral Requirements of SMEs:The Evidence from Less–Developed Countries," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance), Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi" 12111, Universita di Modena e Reggio Emilia, Facoltà di Economia "Marco Biagi".
  9. Norden, Lars & van Kampen, Stefan, 2013. "Corporate leverage and the collateral channel," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(12), pages 5062-5072.
  10. Efraim Benmelech & Nittai Bergman & Anna Milanez & Vladimir Mukharlyamov, 2014. "The Agglomeration of Bankruptcy," NBER Working Papers 20254, National Bureau of Economic Research, Inc.
  11. Berger, A.N. & Frame, W.S. & Ioannidou, V., 2012. "Reexamining the Empirical Relation between Loan Risk and Collateral: The Role of the Economic Characteristics of Collateral," Discussion Paper, Tilburg University, Center for Economic Research 2012-078, Tilburg University, Center for Economic Research.
  12. Golbeck, Steven & Linetsky, Vadim, 2013. "Asset financing with credit risk," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(1), pages 43-59.
  13. Anton Korinek, 2011. "Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses," NFI Working Papers 2011-WP-13, Indiana State University, Scott College of Business, Networks Financial Institute.
  14. Wojahn, Oliver W., 2012. "Why does the airline industry over-invest?," Journal of Air Transport Management, Elsevier, Elsevier, vol. 19(C), pages 1-8.
  15. Allen N. Berger & W. Scott Frame & Vasso Ioannidou, 2011. "Reexamining the empirical relation between loan risk and collateral: the roles of collateral characteristics and types," Working Paper, Federal Reserve Bank of Atlanta 2011-12, Federal Reserve Bank of Atlanta.
  16. Gagliardini, Patrick & Gouriéroux, Christian, 2013. "Correlated risks vs contagion in stochastic transition models," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(11), pages 2241-2269.
  17. Drobetz, Wolfgang & Gounopoulos, Dimitrios & Merikas, Andreas & Schröder, Henning, 2013. "Capital structure decisions of globally-listed shipping companies," Transportation Research Part E: Logistics and Transportation Review, Elsevier, Elsevier, vol. 52(C), pages 49-76.
  18. Vittoria Cerasi & Alessandro Fedele & Raffaele Miniaci, 2013. "Product market competition and collateralized debt," Working Papers, University of Milano-Bicocca, Department of Economics 238, University of Milano-Bicocca, Department of Economics, revised Mar 2013.
  19. Garcia-Appendini, Emilia & Montoriol-Garriga, Judit, . "Trade Credit and Financial Distress," Working Papers on Finance 1411, University of St. Gallen, School of Finance.

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