The Real costs of Industry Contagion

Item Type Monograph (Working Paper)
Abstract

In this paper I analyze whether the higher financing costs following the distress or bankruptcy of one firm affect the real investment decisions of non-distressed industry competitors. To achieve identification of the causal effect of contagion on investment, I use a difference-in-differences approach that compares within-firm changes in investment around the industry distress for non-distressed competitors with large proportions of their debt maturing immediately after the industry distress, relative to other non-distressed competitors in the same industry but that did not have debt maturing immediately after the industry distress. Results suggest that the former firms, which are more affected by the higher costs of financing due to contagion, reduce their capital expenditures to capital ratio by around 10% more than the less-sensitive firms. Further results show that contagion effects are milder in concentrated and low-leveraged industries, as well as in industries that do not rely too heavily on external financing.

Authors García-Appendini, Emilia
Language English
Keywords Corporate investment, contagion, bankruptcy, distress, market structure
Subjects business studies
HSG Classification contribution to scientific community
Refereed No
Date 2014
Publisher SoF - HSG
Place of Publication St. Gallen
Series Name School of Finance Working Paper Series
Number 2014/10
Depositing User Prof. PhD Emilia García-Appendini
Date Deposited 19 Jun 2014 10:59
Last Modified 23 Aug 2016 11:19
URI: https://www.alexandria.unisg.ch/publications/232245

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García-Appendini, Emilia: The Real costs of Industry Contagion. School of Finance Working Paper Series, 2014, 2014/10.

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https://www.alexandria.unisg.ch/id/eprint/232245
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