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Peer Financial Distress and Individual Leverage

Author

Listed:
  • Ankit Kalda
  • Lauren Cohen

Abstract

Using health shocks to identify financial distress situations, I document that peer distress leads to a decline in individual leverage and debt on average. Individual leverage declines by 5.7% and remains deflated for at least five years following peer distress. This decline occurs as individuals borrow less on the intensive margin, pay higher fractions of their debt and save more while their income remains unchanged. As a result, individuals are less likely to default during the period following peer distress. The heterogeneity in responses highlight the role of changes in beliefs and preferences as the underlying mechanism. (JEL D10, D12, D14, D84, H31, R20)Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Ankit Kalda & Lauren Cohen, 2020. "Peer Financial Distress and Individual Leverage," The Review of Financial Studies, Society for Financial Studies, vol. 33(7), pages 3348-3390.
    • Handle: RePEc:oup:rfinst:v:33:y:2020:i:7:p:3348-3390.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz077
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    Citations

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    Cited by:

    1. Christa N. Gibbs & Benedict Guttman-Kenney & Donghoon Lee & Scott Nelson & Wilbert Van der Klaauw & Jialan Wang, 2024. "Consumer Credit Reporting Data," Staff Reports 1114, Federal Reserve Bank of New York.
    2. Gopalan, Radhakrishnan & Gormley, Todd A. & Kalda, Ankit, 2021. "It’s not so bad: Director bankruptcy experience and corporate risk-taking," Journal of Financial Economics, Elsevier, vol. 142(1), pages 261-292.
    3. Ajirloo, Bahman Fathi & Switzer, Lorne N., 2022. "Self-disclosed peer effects on corporate capital structure," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    4. Xu, Yilan & Box-Couillard, Sebastien, 2022. "Social learning about climate change risk," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322309, Agricultural and Applied Economics Association.
    5. Cookson, J. Anthony & Gilje, Erik P. & Heimer, Rawley Z., 2022. "Shale shocked: Cash windfalls and household debt repayment," Journal of Financial Economics, Elsevier, vol. 146(3), pages 905-931.
    6. J. Anthony Cookson & Erik P. Gilje & Rawley Z. Heimer, 2020. "Shale Shocked: Cash Windfalls and Household Debt Repayment," NBER Working Papers 27782, National Bureau of Economic Research, Inc.
    7. Machokoto, Michael & Chipeta, Chimwemwe & Ibeji, Ngozi, 2021. "The institutional determinants of peer effects on corporate cash holdings," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    8. Liu, Yongda & Padgett, Carol & Yin, Chao, 2022. "Internal information quality and financial policy peer effects," International Review of Financial Analysis, Elsevier, vol. 84(C).
    9. Yilan Xu & Sébastien Box‐Couillard, 2024. "Social learning about climate risks," Economic Inquiry, Western Economic Association International, vol. 62(3), pages 1172-1191, July.
    10. Di Maggio, Marco & Kermani, Amir & Ramcharan, Rodney & Yao, Vincent & Yu, Edison, 2022. "The pass-through of uncertainty shocks to households," Journal of Financial Economics, Elsevier, vol. 145(1), pages 85-104.
    11. Majlesi, Kaveh & Molin, Elin & Roth, Paula, 2024. "Severe Health Shocks and Financial Well-Being," CINCH Working Paper Series (since 2020) 82497, Duisburg-Essen University Library, DuEPublico.

    More about this item

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General

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