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  • June 2019
  • Article
  • Journal of Accounting Research

Consequences of Debt Forgiveness: Strategic Default Contagion and Lender Learning

By: Gerardo Pérez Cavazos
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Abstract

I use a unique data set of loans to small business owners to examine whether lenders face adverse consequences when they grant debt forgiveness to borrowers. I provide evidence consistent with borrowers communicating their debt forgiveness to other borrowers, who then more often strategically default on their own obligations. This strategic default contagion is economically large. When the lender doubles debt forgiveness, the default rate increases by 10.9% on average. Using an exogenous shock to the lender's forgiveness policy, my findings suggest that as the lender learns about the extent of borrower communication, the lender tightens its debt forgiveness policy to mitigate default contagion.

Keywords

Debt Forgiveness; Strategic Default Contagion; Contracting; Borrowing And Debt; Communication; Learning

Citation

Pérez Cavazos, Gerardo. "Consequences of Debt Forgiveness: Strategic Default Contagion and Lender Learning." Journal of Accounting Research 57, no. 3 (June 2019): 797–841.
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About The Author

Gerardo Perez Cavazos

Accounting and Management
→More Publications

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More from the Author
  • Accounting for Leases at American Airlines (A) and (B) By: Jonas Heese and Gerardo Pérez Cavazos
  • When the Boss Comes to Town: The Effects of Headquarters' Visits on Facility-Level Misconduct By: Jonas Heese and Gerardo Pérez Cavazos
  • Accounting for Leases at American Airlines (A) By: Jonas Heese, Gerardo Pérez Cavazos and Julia Kelley
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