Industry Contagion in Loan Spreads

Hertzel, Michael G.; Officer, Micah S.

doi:10.2139/ssrn.1573026

Cited by 65 publications

(86 citation statements)

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“…The inclusion of these variables is important for two reasons. First, prior research has shown that less profitable, more highly leveraged, and more risky firms face a higher cost of bank borrowing (see, e.g., Graham et al 2008;Hertzel and Officer 2012). Second, it is possible that the number of peer restatements in an industry (COUNT PEER RESTATE) is correlated with a borrower's past performance or financial health.…”

Section: Methodsmentioning

confidence: 99%

“…There is limited empirical research, however, on how lenders use information from linked firms when setting contract terms. Hertzel and Officer (2012) show that one firm's bankruptcy announcement affects the bank loan contracts of its rivals in the same industry, through both increases in loan spread and collateral requirements. De Franco et al (2012) examine the loan pricing implications of rival firms sharing a common lender.…”

Section: Introductionmentioning

confidence: 99%

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Lenders’ Response to Peer and Customer Restatements

Files¹,

Gurun²

2018

Contemporary Accting Res

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We investigate whether restatements announced by economically related firms influence the contract terms a borrower receives from lenders. A restatement by a major customer firm increases the loan spread of a borrower by 11 basis points, on average. The contagion effects of customer restatements are higher (45 basis points) when a borrower's switching costs are high. Restatements by peer firms in the same industry also increase a borrower's loan spread, and this increase occurs regardless of restatement severity. Moreover, the sensitivity of loan spread to peer restatements is significantly greater when the restating peer firms are also in the bank's lending portfolio, suggesting that a lender's personal experience with restatements in an industry makes it more attuned to the potential implications of these restatements for the borrowing firm. Finally, our results suggest that lenders utilize information from peer restatements to anticipate future restatements by the borrowing firm.

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Section: Methodsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Lenders’ Response to Peer and Customer Restatements

Files¹,

Gurun²

2018

Contemporary Accting Res

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“…For example, Lang and Stulz (1992) show that when a firm declares bankruptcy, on average, competitor firm stock prices react negatively. Likewise, Hertzel and Officer (2008) and Jorion and Zhang (2007) examine the effect of bankruptcy on competitors' loan yields and CDS spreads 3…”

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confidence: 99%

Bankruptcy and the Collateral Channel

Benmelech

Bergman

2011

The Journal of Finance

221

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Do bankrupt firms impose negative externalities on their nonbankrupt competitors? We propose and analyze a collateral channel in which a firm's bankruptcy reduces the collateral value of other industry participants, thereby increasing their cost of debt financing. We identify the collateral channel using novel data of secured debt tranches issued by U.S. airlines that include detailed descriptions of the underlying collateral pools. Our estimates suggest that industry bankruptcies have a sizeable impact on the cost of debt financing of other industry participants. We discuss how the collateral channel may lead to contagion effects that amplify the business cycle during industry downturns.

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“…In column (1), we report the regression results with only the wave indicator variables (

italicBeginning

italicMiddle

, and

italicEnd

). Hertzel and Officer () show that industry contagion is particularly severe in industry bankruptcy waves. Consistent with their findings, the estimated coefficients of the wave indicator dummy variables are positive and statistically significant, indicating that the loan contracts that originated within an industry bankruptcy wave tend to have higher spreads than those originated outside of a wave.…”

Section: Resultsmentioning

confidence: 99%

“…The authors document a negative effect of a company's bankruptcy filing on the pricing of the debt capital of its industry peers and find that such industry contagion is particularly severe in the middle of the industry bankruptcy wave. Although Hertzel and Officer () find evidence suggesting that this contagion effect could be the result of a change in the competitive environment as the bankrupt company exits the market, they do not rule out the possibility that other channels of contagion could be at play. In the present study, we go one step further by using the realized industry‐level recovery rate as an instrument to test the debt recovery channel of bankruptcy contagion.…”

Section: Related Literature and Hypothesis Developmentmentioning

confidence: 99%

Intra‐industry bankruptcy contagion: Evidence from the pricing of industry recovery rates

Chang

Hsieh

Liu

et al. 2019

Euro Fin Management

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How does bankruptcy contagion propagate among industry peers? We study the debt recovery channel of industry contagion by examining whether the cost of a company's debt is affected by the observed recovery rates of its bankrupt industry peers. Our results show that lower industry recovery rates are associated with higher loan spreads, but only when the contracts were originated during industry bankruptcy waves. Consistent with the debt recovery channel of industry contagion, we find that the negative effects of industry recovery rates are significantly stronger under situations where the effect is expected to be more salient.

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Industry Contagion in Loan Spreads

Cited by 65 publications

References 0 publications

Lenders’ Response to Peer and Customer Restatements

Lenders’ Response to Peer and Customer Restatements

Bankruptcy and the Collateral Channel

Intra‐industry bankruptcy contagion: Evidence from the pricing of industry recovery rates

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