Distressed firms may avoid an otherwise beneficial Chapter 11 reorganization because they fear losing customers. In our recent paper, we use two experiments to estimate the effect of corporate bankruptcy on consumer demand for a bankrupt firm’s products. We find that learning about a Chapter 11 bankruptcy filing reduces a consumer’s willingness to pay for the bankrupt firm’s products by 18-35 percent, depending on the industry.
We consider three reasons why consumers might care about a corporate bankruptcy. First, consumers might worry that a bankruptcy could lead to liquidation, preventing them from taking advantage of warranties, return policies, reward … Read more