Consequences of Debt Forgiveness: Strategic Default Contagion and Lender Learning

Gerardo Pérez‐cavazos

Journal of Accounting Research, 2019, vol. 57, issue 3, 797-841

Abstract: I use a unique data set of loans to small business owners to examine whether lenders face adverse consequences when they grant debt forgiveness to borrowers. I provide evidence consistent with borrowers communicating their debt forgiveness to other borrowers, who then more frequently strategically default on their own obligations. This strategic default contagion is economically large. When the lender doubles debt forgiveness, the default rate increases by 10.9% on average. Using an exogenous shock to the lender's forgiveness policy, my findings suggest that as the lender learns about the extent of borrower communication the lender tightens its debt forgiveness policy to mitigate default contagion.

Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/1475-679X.12252

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:joares:v:57:y:2019:i:3:p:797-841

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0021-8456

Access Statistics for this article

Journal of Accounting Research is currently edited by Philip G. Berger, Luzi Hail, Christian Leuz, Haresh Sapra, Douglas J. Skinner, Rodrigo Verdi and Regina Wittenberg Moerman

More articles in Journal of Accounting Research from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().