In our paper, we empirically study the effect of Chrysler's Chapter 11 bankruptcy filing on the unit sales of its competitors in the U.S. automotive industry. On the one hand, the demand for the products of the competitors could increase as they may benefit from the distress of the bankrupt firm (competitive effect). On the other hand, competitors of a bankrupt firm could experience lower sales, if the bankruptcy increases consumer uncertainty about the competitors’ own viability (contagion effect). A challenge in measuring the impact of bankruptcies on competitors has been the coincident global economic decline during late 2000s (i.e., the Great Recession) and the potential effect of a U.S. federal scrappage program known as “cash for clunkers.” To identify the effect of the bankruptcy filing, we employ a regression-discontinuity-in-time design based on a temporal discontinuity in treatment (i.e., bankruptcy filing), along with an extensive set of control variables. Such a design is facilitated by a unique data set at the dealer-model-day level, which allows us to compare changes in unit sales in close temporal vicinity of the filing. 
 
We find that unit sales for an average competitor of Chrysler reduce by 28% following Chrysler's bankruptcy filing. This finding suggests that the contagion effect on sales outweighs the competitive effect in our context (negative spillover effect). Our results also indicate that this negative spillover effect is driven by a heightened consumer uncertainty about the viability of the bankrupt firm's competitors. For example, we show that the sales of competitors’ vehicles that compete within the same segments as the bankrupt firm's vehicles, or those that provide lower value for money, are affected more negatively by Chrysler’s bankruptcy filing. We also observe more web search activity involving the “bankruptcy” search term for Chrysler's competitors after the filing.

These findings have important implications for managers and policymakers. From the firms’ perspective, our results show that not only the bankrupt firm is vulnerable to a negative reaction in consumer demand, but also its competitors. In addition, our findings suggest that competitors that compete for similar segments as the bankrupt firm are more vulnerable to a negative spillover effect. Moreover, within a competitor’s product line, some products (e.g., those offering less value for money) might be more prone to a negative spillover effect than others. This is a novel insight as previous finance studies on the contagion effects of bankruptcies are based on a firm-level analysis as opposed to a product-level analysis.
 
Following the major automaker bankruptcies, the U.S. government aimed to avoid a potential collapse of the U.S. auto industry. Our results therefore also inform policymakers, when the government supervises the bankruptcy filings of U.S. automakers, such as Chrysler. On one hand, our findings indicate the unexpected negative spillover effect of a bankruptcy filing for the bankrupt firm’s competitors. On the other hand, our results indicate, contrary to the conventional wisdom, that U.S. competitors might not necessarily be at a disadvantageous position compared to foreign competitors following Chrysler’s bankruptcy, for in our setting, it appears that the adverse effect of the bankruptcy on competitors is greater when there is segment overlap, but not when there is country-of-origin overlap.

Cem Ozturk is Assistant Professor at Georgia Institute of Technology, Scheller College of Business.

Pradeep Chintagunta is Professor of Marketing at University of Chicago Booth School of Business.

Sriram Venkataraman is Associate Professor of Marketing at University of North Carolina at Chapel Hill, Kenan-Flagler Business School.