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Bankruptcy contagion and the market response to intra -industry earnings news

I seek a deeper understanding of bankruptcy contagion and its impact on the industry information environment by examining how intra-industry bankruptcy affects the equity market response to earnings news subsequently released by industry survivors. I document significant negative asymmetry, i.e., a weaker response to good relative to bad news, in the response to earnings news in the wake of intra-industry bankruptcy. Results are consistent with a combination of model uncertainty-induced asymmetry and an on-average reduction in earnings informativeness stemming from increased cross-firm default risk assessments. Results are further consistent with managerial preemptive disclosure of good news exacerbating, but not completely explaining, this asymmetry. Additional tests provide evidence that these information effects are directly associated with contagion. The results facilitate a deeper understanding of contagion, and provide evidence that bankruptcy imposes broader industry-wide consequences than previously documented.