The Effect of Bankruptcy Filings on Rivals' Operating Performance: Evidence from 51 Large Bankruptcies

I examine the operating performance of financially distressed firms and their rivals in the periods surrounding 51 bankruptcy filings. The analysis indicates that filings are associated with declines in rivals' revenues and profit margins. The declines occur prior to and coincident with bankruptcy filings, but dissipate quickly after a filing occurs. The adverse effect on rivals' profit margins appears to be caused by changes in firms' product market conduct, as it is robust to several methods used to screen out filings where a common shock has occurred. I then examine whether market structure affects the link between filings and rivals' profit margins. The market structure effects appear to be small.