Intra-industry spillover effects: Evidence from bankruptcy filings

Firms contract capital expenditure, reduce new debt issuance and face a higher cost of debt following the bankruptcy of an industry peer. The spillover effect declines with industrial distance and strengthens with the saliency of the bankruptcy. Furthermore, industries that are externally financially dependent are more vulnerable to the contagion effect. The investment contraction is not driven by industry asset reallocation, the presence of distressed firms or strategic competitive behavior by peers. We establish causality by identifying idiosyncratic bankruptcies and implementing an instrumental variable estimation to mitigate the confounding effect of general industry conditions.