ABSTRACT We estimate the indirect costs of corporate bankruptcy associated with lost customers. In incentivized experiments, randomly informing consumers about a firm's Chapter 11 reorganization lowers their willingness to pay for the firm's products by 17% to 28%. Consumers worry that bankruptcy could reduce product quality or prevent future interactions with the bankrupt firm. On average, 38% of consumers are aware of major bankruptcies. Using our experiments to estimate a structural model, we show that these indirect costs of bankruptcy amount to 12% to 15% of a firm's value. We show that these costs are unlikely to arise before bankruptcy.
Antill et al. (Mon,) studied this question.