Finance Seminar Series - Samuel Antill, Harvard University
Time:
-
Location:
CSOM 1-136
Authors: Samuel Antill and Megan Hunter
Abstract: We estimate the indirect costs of corporate bankruptcy associated with lost customers. In incentivized experiments, randomly informing consumers about a firm’s Chapter 11 reorganization lowers their willingness to pay for the firm’s products by 18-35%. Up to 48% of consumers are aware of major bankruptcies. Using our experiments to estimate a structural model, we show that a Chapter 11 bankruptcy causally reduces a firm’s value by 10-31%, depending on the industry, through lost customers. We show that these costs are unlikely to arise before bankruptcy. Calibrating a capital-structure model, we show these indirect bankruptcy costs meaningfully impact leverage choices for nonbankrupt firms. Our results thus provide novel support for the tradeoff theory, a pillar of corporate finance.