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

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  • MVK, Jagannath
  • Ladkani, Radha Mukesh

Abstract

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.

Suggested Citation

  • MVK, Jagannath & Ladkani, Radha Mukesh, 2024. "Bankruptcy spillovers and stock price crash risk of non-bankrupt firms," Finance Research Letters, Elsevier, vol. 69(PB).
  • Handle: RePEc:eee:finlet:v:69:y:2024:i:pb:s1544612324011565
    DOI: 10.1016/j.frl.2024.106127
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    More about this item

    Keywords

    Stock price crash risk; Bankruptcy spillover; Creditor rights;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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