How Do Exogenous Shocks Cause Bankruptcy? Balance Sheet and Income Statement Channels

Abstract

We are the first to examine whether exogenous shocks cause personal bankruptcy through the balance sheet channel and/or the income statement channel. For identification, we examine the effect of exogenous, politically motivated government payments on 200,000 Canadian bankruptcy filings. We find support for the balance sheet channel, in that receipt of the exogenous cash increases the net balance sheet benefits of bankruptcy (unsecured debt discharged minus liquidated assets forgone) required by filers. We also find limited support for the income statement channel, in that exogenous payments reduce bankruptcy filings from individuals whose current expenses exceed their current income.