Bankruptcy spillovers and stock price crash risk of non-bankrupt firms

•Bankruptcy clustering increases the stock price crash risk of non-bankrupt firms.•The increase is greater in financially constrained and financially distressed non-bankrupt firms.•Creditor-oriented bankruptcy regime moderates the contagion of bankruptcy clustering. This paper examines whether corpo...

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Bibliographic Details
Published in:Finance research letters 2024-11, Vol.69, p.106127, Article 106127
Main Authors: MVK, Jagannath, Ladkani, Radha Mukesh
Format: Article
Language:English
Subjects:
Bankruptcy spillover
Creditor rights
Stock price crash risk
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Summary:•Bankruptcy clustering increases the stock price crash risk of non-bankrupt firms.•The increase is greater in financially constrained and financially distressed non-bankrupt firms.•Creditor-oriented bankruptcy regime moderates the contagion of bankruptcy clustering. This paper examines whether corporate bankruptcies affect non-bankrupt firms' stock price crash risk. We observe that an upsurge in corporate bankruptcies adversely affects the crash risk of non-bankrupt firms in the industry. The increase in the crash risk following bankruptcy clustering in an industry is greater in financially constrained and financially distressed non-bankrupt firms. We also find that the creditor-in-control bankruptcy regime moderates the adverse effects of bankruptcy spillovers on the crash risk of non-bankrupt firms. Our results are robust to endogeneity tests (using GMM estimators) and tests that exclude industry downturns and macroeconomic shocks.
ISSN:1544-6123
DOI:10.1016/j.frl.2024.106127