The Agglomeration of Bankruptcy

By Efraim Benmelech, Nittai Bergman, Anna Milanez, & Vladimir Mukharlyamov

In “The Agglomeration of Bankruptcy,” Professor Benmelech and his coauthors examine the spread of bankruptcy by analyzing the ways in which bankrupt firms impose costs on nearby non-bankrupt competitors. The authors argue that the normally positive economies of agglomeration created by stores in close proximity to one another can become detrimental during downturns. When a store is in distress, proximity works to amplify the negative effects of distress. The result is that retail stores in distress impose costs, such as decreasing sales, on nearby peers, which can ultimately lead to store closures and ultimately bankruptcy.

The authors use a novel and detailed dataset of all national chain store locations and closures across the United States from 2005 to 2010. The authors show that stores located in proximity to those of national chains that are liquidated are more likely to close themselves. Importantly, this effect is stronger for stores in the same industry as the liquidating national chain as compared to stores in industries different from that of the liquidating chain. Further, the geographical effect of store closures on neighboring stores is more pronounced in financially weaker firms.

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This summary was drafted by Robert Niles (J.D./M.B.A. ’16)

The HLS Bankruptcy Roundtable will be off-line for the holidays. We will be back in January.