IDEAS home Printed from https://ideas.repec.org/p/usg/sfwpfi/201410.html
   My bibliography  Save this paper

Idiosyncratic Shocks and Industry Contagion: Evidence from a Quasi-experiment

Author

Listed:
  • Garcia-Appendini, Emilia

    ()

Abstract

I analyze whether the higher financing costs following the idiosyncratic bankruptcy or default of one firm affect the real investment decisions of non-distressed competitors. Results show that firms which are more affected by the higher financing costs (“treated firms”) reduce investment by around 10% more than their less vulnerable peers. These results are not driven by industry downturns that coincide with the bankruptcies or defaults, nor are they caused by higher refinancing risk or forward-looking managers of treated firms. Results suggest that idiosyncratic shocks can be transmitted to peers through an asymmetric information channel, but not through a collateral channel.

Suggested Citation

  • Garcia-Appendini, Emilia, 2014. "Idiosyncratic Shocks and Industry Contagion: Evidence from a Quasi-experiment," Working Papers on Finance 1410, University of St. Gallen, School of Finance, revised Mar 2015.
  • Handle: RePEc:usg:sfwpfi:2014:10
    as

    Download full text from publisher

    File URL: http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1410.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Zhiguo He & Wei Xiong, 2012. "Rollover Risk and Credit Risk," Journal of Finance, American Finance Association, vol. 67(2), pages 391-430, April.
    2. Murray Z. Frank & Vidhan K. Goyal, 2009. "Capital Structure Decisions: Which Factors Are Reliably Important?," Financial Management, Financial Management Association International, vol. 38(1), pages 1-37, March.
    3. Flannery, Mark J, 1986. " Asymmetric Information and Risky Debt Maturity Choice," Journal of Finance, American Finance Association, vol. 41(1), pages 19-37, March.
    4. Valta, Philip, 2012. "Competition and the cost of debt," Journal of Financial Economics, Elsevier, vol. 105(3), pages 661-682.
    5. Gerard Hoberg & Gordon Phillips, 2010. "Real and Financial Industry Booms and Busts," Journal of Finance, American Finance Association, vol. 65(1), pages 45-86, February.
    6. Whited, Toni M, 1992. " Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, vol. 47(4), pages 1425-1460, September.
    7. Maksimovic, Vojislav & Titman, Sheridan, 1991. "Financial Policy and Reputation for Product Quality," Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 175-200.
    8. Efraim Benmelech & Nittai K. Bergman, 2011. "Bankruptcy and the Collateral Channel," Journal of Finance, American Finance Association, vol. 66(2), pages 337-378, April.
    9. Hertzel, Michael G. & Officer, Micah S., 2012. "Industry contagion in loan spreads," Journal of Financial Economics, Elsevier, vol. 103(3), pages 493-506.
    10. Jorion, Philippe & Zhang, Gaiyan, 2007. "Good and bad credit contagion: Evidence from credit default swaps," Journal of Financial Economics, Elsevier, vol. 84(3), pages 860-883, June.
    11. Michael Faulkender & Mitchell Petersen, 2012. "Investment and Capital Constraints: Repatriations Under the American Jobs Creation Act," Review of Financial Studies, Society for Financial Studies, vol. 25(11), pages 3351-3388.
    12. Lemmon, Michael & Roberts, Michael R., 2010. "The Response of Corporate Financing and Investment to Changes in the Supply of Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(03), pages 555-587, June.
    13. Alberto Abadie & Guido W. Imbens, 2006. "Large Sample Properties of Matching Estimators for Average Treatment Effects," Econometrica, Econometric Society, vol. 74(1), pages 235-267, January.
    14. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 169-215.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Corporate investment; contagion; bankruptcy; distress; market structure; isiosyncratic shocks;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:usg:sfwpfi:2014:10. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Geraldine Frei). General contact details of provider: http://edirc.repec.org/data/cfisgch.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.