September 2019
Article
Journal of Financial Economics

Bankruptcy Spillovers

By: Shai Bernstein, Emanuele Colonnelli, Xavier Giroud and Benjamin Iverson

Format:Print

Abstract

How do different bankruptcy approaches affect the local economy? Using U.S. Census microdata, 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 employment declines substantially in the immediate neighborhood of the liquidated establishments, relative to reorganized establishments. The spillover effects are highly localized and concentrate in nontradable and service sectors, consistent with a reduction in local consumer traffic and a decline in knowledge spillovers between firms. The evidence highlights the externalities that bankruptcy design can impose on nonbankrupt firms.

Keywords

Agglomeration; Insolvency and Bankruptcy; Economy; Governing Rules, Regulations, and Reforms

Citation

Bernstein, Shai, Emanuele Colonnelli, Xavier Giroud, and Benjamin Iverson. "Bankruptcy Spillovers." Special Issue on Labor and Finance. Journal of Financial Economics 133, no. 3 (September 2019): 608–633.