Weathering Distress: Corporate Bankruptcy and Bank Competition

Abstract

This paper examines whether competitive banking markets affect the likelihood that firms file for bankruptcy. We compile large and unique databases of U.S. public and private corporate bankruptcies and find that bank competition significantly reduces firms' filing rates. Chapter 11 and 7 filings both decrease. The results are not concentrated among any specific bankruptcy outcome and are unlikely to be driven by forum shopping. The effects are geographically widespread and driven by distressed firms' improved access to credit. The effects become stronger during economic downturns and in states that host firms with ex-ante higher probabilities of distress.