Bankruptcy and the Collateral Channel

Efraim Benmelech*, Nittai K. Bergman

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

135 Scopus citations


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.

Original languageEnglish (US)
Pages (from-to)337-378
Number of pages42
JournalJournal of Finance
Issue number2
StatePublished - Apr 2011

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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