Bankruptcy Spillovers

Bankruptcy Spillovers

By Shai Bernstein, Emanuele Colonnelli, Xavier Giroud, Benjamin Iverson
May 5,2017Working Paper No. 3564

Forthcoming in Journal of Financial Economics

How do different bankruptcy approaches affect the local economy? Using U.S. Census microdata, we explore the spillover effects of reorganization and liquidation on geographically proximate firms. We exploit the random assignment of bankruptcy judges as a source of exogenous variation in the probability of liquidation. We find that employment declines substantially in the immediate neighborhood of the liquidated establishments, relative to reorganized establishments. The spillover effects are highly localized and concentrate in non-tradable and service sectors, consistent with a reduction in local consumer traffic and a decline in knowledge spillovers between firms. The evidence highlights the externalities that bankruptcy design can impose on non-bankrupt firms.