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Media type:
E-Article
Title:
Consequences of Debt Forgiveness: Strategic Default Contagion and Lender Learning
Contributor:
PÉREZ‐CAVAZOS, GERARDO
imprint:
Wiley, 2019
Published in:Journal of Accounting Research
Language:
English
DOI:
10.1111/1475-679x.12252
ISSN:
0021-8456;
1475-679X
Origination:
Footnote:
Description:
<jats:title>ABSTRACT</jats:title><jats:p>I use a unique data set of loans to small business owners to examine whether lenders face adverse consequences when they grant debt forgiveness to borrowers. I provide evidence consistent with borrowers communicating their debt forgiveness to other borrowers, who then more frequently strategically default on their own obligations. This strategic default contagion is economically large. When the lender doubles debt forgiveness, the default rate increases by 10.9% on average. Using an exogenous shock to the lender's forgiveness policy, my findings suggest that as the lender learns about the extent of borrower communication the lender tightens its debt forgiveness policy to mitigate default contagion.</jats:p>