The Contagion Effect of Intra-Industry Debt Defaults on Financial Decisions of Capital Structure

This paper investigates whether intra-industry debt defaults generate a contagion effect by influencing financial decisions and capital allocation efficiency of peers within the industry. Additionally, we examine the mechanism of intra-industry default contagion. Using theoretical and empirical evidence in our work, we find that the contagion effect of intra-industry default could increase precautionary motivation and risk-averse sentiments in fending off the risks, which in turn increases financing costs and reduce the efficiency of capital allocation for peer firms. The implication is helpful for corporate managers, investors and market regulators in facilitating effective decision-making to the contagion effect of intra-industry debt defaults