Bankruptcy Spillovers

43 Pages Posted: 13 Feb 2017 Last revised: 16 Apr 2022

See all articles by Shai Bernstein

Shai Bernstein

Harvard Business School

Emanuele Colonnelli

University of Chicago - Booth School of Business

Xavier Giroud

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Benjamin Charles Iverson

Brigham Young University

Multiple version iconThere are 2 versions of this paper

Date Written: February 2017

Abstract

How do different bankruptcy approaches affect the local economy? Using U.S. Census microdata at the establishment level, 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 within a five-year period, employment declines substantially in the immediate neighborhood of the liquidated establishments, relative to reorganized establishments. Most of the decline is due to lower growth of existing establishments and, to a lesser extent, reduced entry into the area. The spillover effects are highly localized and concentrate in the non-tradable and service sectors, particularly when the bankrupt firm operates in the same sector. These results suggest that liquidation leads to a reduction in consumer traffic to the local area and to a decline in knowledge spillovers between firms. The evidence is inconsistent with the notion that liquidation leads to creative destruction, as the removal of bankrupt businesses does not lead to increased entry nor the revitalization of the area.

Suggested Citation

Bernstein, Shai and Colonnelli, Emanuele and Giroud, Xavier and Iverson, Benjamin Charles, Bankruptcy Spillovers (February 2017). NBER Working Paper No. w23162, Available at SSRN: https://ssrn.com/abstract=2915989

Shai Bernstein (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States

Emanuele Colonnelli

University of Chicago - Booth School of Business ( email )

HOME PAGE: http://emanuelecolonnelli.com

Xavier Giroud

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States

HOME PAGE: http://www.columbia.edu/~xg2285/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Benjamin Charles Iverson

Brigham Young University ( email )

United States

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