Article2018

The Agglomeration of Bankruptcy

Efraim Benmelech · NITTAI K. BERGMAN · Anna Milanez · Vladimir Mukharlyamov

45 citations0/0 files storedReview of Financial Studies

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Corporate Insolvency and Governance Banking stability, regulation, efficiency Financial Distress and Bankruptcy Prediction

Abstract

This paper identifies a new channel through which bankrupt firms undergoing liquidation impose negative externalities on their nonbankrupt peers. The liquidation of a retail chain weakens the economies of agglomeration in any given local area, reducing the attractiveness of retail centers for remaining stores and leading to contagion of financial distress. We find that firms with greater geographic exposure to bankrupt retailers are more likely to close stores in affected areas. We further show that the effect of these externalities on nonbankrupt peers is higher when affected stores are smaller and are operated by firms in financial distress. Received December 16, 2015; editorial decision June 28, 2018 by Editor Philip Strahan.

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References

1990Increasing Returns and Economic Geography 1929Stability in Competition 1970Information and Consumer Behavior 1979Monopolistic Competition with Outside Goods 1992Liquidation Values and Debt Capacity: A Market Equilibrium Approach 1999Home Bias at Home: Local Equity Preference in Domestic Portfolios 1997Geographic Concentration in U.S. Manufacturing Industries: A Dartboard Approach 1995Industrial Development in Cities

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