Review of Financial Studies Vol. 33 No. 7 2020
Peer Financial Distress and Individual Leverage
Abstract
Using health shocks to identify financial distress situations, I document that peer distress leads to a decline in individual leverage and debt on average. Individual leverage declines by 5.7% and remains deflated for at least five years following peer distress. This decline occurs as individuals borrow less on the intensive margin, pay higher fractions of their debt and save more while their income remains unchanged. As a result, individuals are less likely to default during the period following peer distress. The heterogeneity in responses highlight the role of changes in beliefs and preferences as the underlying mechanism.
- DOI
- 10.1093/rfs/hhz077
- Volume
- 33
- Issue
- 7
- Pages
- 3348-3390
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref