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Idiosyncratic Shocks and Industry Contagion: Evidence from a Quasi-experiment

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  • Garcia-Appendini, Emilia

Abstract

I analyze whether the higher financing costs following the idiosyncratic bankruptcy or default of one firm affect the real investment decisions of non-distressed competitors. Results show that firms which are more affected by the higher financing costs (“treated firms”) reduce investment by around 10% more than their less vulnerable peers. These results are not driven by industry downturns that coincide with the bankruptcies or defaults, nor are they caused by higher refinancing risk or forward-looking managers of treated firms. Results suggest that idiosyncratic shocks can be transmitted to peers through an asymmetric information channel, but not through a collateral channel.

Suggested Citation

  • Garcia-Appendini, Emilia, 2014. "Idiosyncratic Shocks and Industry Contagion: Evidence from a Quasi-experiment," Working Papers on Finance 1410, University of St. Gallen, School of Finance, revised Mar 2015.
    • Handle: RePEc:usg:sfwpfi:2014:10
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    Cited by:

    1. Colombo, Jéfferson A. & Caldeira, João F., 2018. "The role of taxes and the interdependence among corporate financial policies: Evidence from a natural experiment," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 402-423.

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    More about this item

    Keywords

    Corporate investment; contagion; bankruptcy; distress; market structure; isiosyncratic shocks;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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