Bargaining Power, Business Cycle and Levered Equity Risk

Zhiyao Chen and Ilya A. Strebulaev
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Zhiyao Chen: Chinese University of Hong Kong
Ilya A. Strebulaev: Stanford University

Research Papers from Stanford University, Graduate School of Business

Abstract: Bargaining power allows equity holders to recover a fraction of residual assets in bankruptcy, therefore reducing their exposure to default risk. We develop an agency-based model and provide the first evidence via structural estimation that equity holders could extract about 50% of the liquidation surplus from the residual assets. Using a counterfactual experiment, we further demonstrate that bargaining power significantly reduces equity risk, as proxied by stock-cash flow sensitivity. The percentage reduction is 15% during expansions and 36% during recessions for highly leveraged firms, and is 10% during expansions and 26% during recessions for firms with a high book-to-market ratio.

JEL-codes: G12 G13 G33 (search for similar items in EconPapers)
Date: 2016-06
New Economics Papers: this item is included in nep-rmg
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