Communities as Stakeholders : Impact of Corporate Bankruptcies on Local Governments

We provide new evidence that the bankruptcy filing of a locally headquartered and publicly-listed manufacturing firm imposes externalities on the local governments. Compared to matched counties with similar economic trends, municipal bond yields for affected counties increase by 10 bps within a year of the firm’s bankruptcy filing. Counties that are more economically dependent on the industry of the bankrupt firm are more affected and do not immediately recover from the negative impact of the corporate bankruptcy. Our results highlight that local communities are a major stakeholder in public firms and how they are adversely affected by corporate financial distress