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Bankruptcy Spillovers

Author

Listed:
  • Shai Bernstein
  • Emanuele Colonnelli
  • Xavier Giroud
  • Benjamin Iverson

Abstract

How do different bankruptcy approaches affect the local economy? Using U.S. Census microdata at the establishment level, we explore the spillover effects of reorganization and liquidation on geographically proximate firms. We exploit the random assignment of bankruptcy judges as a source of exogenous variation in the probability of liquidation. We find that within a five-year period, employment declines substantially in the immediate neighborhood of the liquidated establishments, relative to reorganized establishments. Most of the decline is due to lower growth of existing establishments and, to a lesser extent, reduced entry into the area. The spillover effects are highly localized and concentrate in the non-tradable and service sectors, particularly when the bankrupt firm operates in the same sector. These results suggest that liquidation leads to a reduction in consumer traffic to the local area and to a decline in knowledge spillovers between firms. The evidence is inconsistent with the notion that liquidation leads to creative destruction, as the removal of bankrupt businesses does not lead to increased entry nor the revitalization of the area.

Suggested Citation

  • Shai Bernstein & Emanuele Colonnelli & Xavier Giroud & Benjamin Iverson, 2017. "Bankruptcy Spillovers," NBER Working Papers 23162, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23162
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    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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