If one firm in a given industry declares bankruptcy, the market may lower the values of other firms in a given industry because the reveals new, negative information about the status of the industry as a whole.This phenomenon is called:
A)the contagion effect.
B)the intra-industry wealth transfer effect.
C)irrational behavior.
D)the sympathy effect.

Question

Quizplus · Accepted Answer

The contagion effect refers to the phenomenon where the financial distress or failure of one firm leads to negative repercussions or a decrease in the value of other firms within the same industry, due to perceived shared risks or problems. This is because the bankruptcy might signal broader industry issues that could affect other companies.

If One Firm in a Given Industry Declares Bankruptcy, the Market