Inter-industry financial contagion and reorganization filings

Authors: Li-Chiu Chi

Journal: Chia Da Management Review. Jun. 2013, 33(1): 37-63.

Keywords: Financial contagion; Inter-industry effect; Reorganization filing; Creditor bank

Abstract:
Corporate bankruptcy and reorganization are important issues in the areas of accounting, economics, and finance, yet this subject has attracted far less attention in the literature. Given that existing studies in this line of research focus primarily on the strategies， procedures, and costs of reorganization, or on its economic impact on shareholders' value, this empirical study, being set out to examine the inter-industry financial contagion effect of a debtor firm' s reorganization filing on the main creditor bank's shareholder wealth, contributes to the scant but promising literature. Moreover, to enhance the usefulness of the regression model, a set of predictor variables (such as bank diversification, debtor size, debtor age, and debtor financial quality) is elaborately organized as per the features of banking sector. An underlying analysis of the reorganization filing data in Taiwan suggests that main creditor banks experience weak but significant negative announcement returns when their debtor firms file petitions for reorganization, which proves the existence of inter-industry financial contagion in bankruptcy reorganization contexts, though such an effect is limited and short-term.