Working Paper: NBER ID: w20254
Authors: Efraim Benmelech; Nittai Bergman; Anna Milanez; Vladimir Mukharlyamov
Abstract: This paper identifies a new channel through which bankrupt firms impose negative externalities on non-bankrupt peers. The bankruptcy and liquidation of a retail chain weakens the economies of agglomeration in any given local area, reducing the attractiveness of retail centers for remaining stores leading to contagion of financial distress. We find that companies with greater geographic exposure to bankrupt retailers are more likely to close stores in affected areas. We further show that the effect of these externalities on non-bankrupt peers is higher when the affected stores are smaller and are operated by firms with poor financial health.
Keywords: bankruptcy; agglomeration economies; retail; negative externalities
JEL Codes: G33; G34; R12; R32; R33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bankruptcy and liquidation of a retail chain (G33) | Weakening of economies of agglomeration (R11) |
| Weakening of economies of agglomeration (R11) | Contagion of financial distress among non-bankrupt peers (E44) |
| Geographic proximity to bankrupt retailers (R32) | Likelihood of store closures among neighboring retailers (L81) |
| Financial health of parent firms (G32) | Likelihood of store closures among neighboring retailers (L81) |
| Store size (L81) | Resilience to neighboring store closures (R23) |