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Bankruptcy and the Collateral Channel

  • Efraim Benmelech
  • Nittai K. Bergman

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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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
Date of revision:
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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