Bankruptcy and the Collateral Channel


  • Benmelech is from Harvard University (the Department of Economics) and NBER, and Bergman is from MIT Sloan School of Management and NBER. We thank Paul Asquith, Douglas Baird, John Campbell, John Cochrane, Lauren Cohen, Shawn Cole, Joshua Coval, Sergei Davydenko, Douglas Diamond, Luigi Guiso, Campbell Harvey (the Editor), Oliver Hart, John Heaton, Christian Leuz, Andrei Shleifer, Jeremy Stein, Heather Tookes, Aleh Tsyvinsky, Jeffrey Zwiebel, an associate editor of the Journal of Finance, two anonymous referees, and seminar participants at DePaul University, The Einaudi Institute for Economics and Finance in Rome, Harvard University, University of Chicago Booth School of Business, and the 2008 Financial Research Association Meeting. Benmelech is grateful for financial support from the National Science Foundation under CAREER award SES-0847392. We also thank Robert Grundy and Phil Shewring from Airclaims, Inc. Ricardo Enriquez and Apurv Jain provided excellent research assistance. All errors are our own.


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.