Strategic Default and Equity Risk Across Countries

Philip Valta, Giovanni Favara and Enrique Schroth
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Enrique Schroth: UvA - University of Amsterdam [Amsterdam] = Universiteit van Amsterdam

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Abstract: We show that the prospect of a debt renegotiation favorable to shareholders reduces the firm's equity risk. Equity beta and return volatility are lower in countries where the bankruptcy code favors debt renegotiations and for firms with more shareholder bargaining power relative to debt holders. These relations weaken as the country's insolvency procedure favors liquidations over renegotiations. In the limit, when debt contracts cannot be renegotiated, equity risk is independent of shareholders' incentives to default strategically. We argue that these findings support the hypothesis that the threat of strategic default can reduce the firm's equity risk.

Keywords: Debt Enforcement; Strategic Default; Liquidation Costs; Equity Risk (search for similar items in EconPapers)
Date: 2012-12
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Citations: View citations in EconPapers (43)

Published in Journal of Finance, 2012, 67 (6), pp.2051-2095. ⟨10.1111/j.1540-6261.2012.01781.x⟩

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Related works:
Journal Article: Strategic Default and Equity Risk Across Countries (2012)
Working Paper: Strategic Default and Equity Risk Across Countries (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00758528

DOI: 10.1111/j.1540-6261.2012.01781.x

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