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

Working Papers from HAL

Abstract: We test whether the firm's systematic equity risk reflects the shareholders' incentives to default strategically on the firm's debt. We use a real options model to relate the shareholders' strategic default behavior to frictions in the debt renegotiation procedure. We test the model's predictions with an international cross-section of stocks, exploiting the exogenous cross-country variation of bankruptcy procedures. We find that the equity beta increases as debt is more strictly enforced. Moreover, the equity beta decreases with liquidation costs and shareholders' bargaining power, and the sensitivity of this relation weakens as the country's debt renegotiation procedures become more creditor friendly.

Keywords: Debt Enforcement; Strategic Default; Liquidation Costs; Equity Risk (search for similar items in EconPapers)
Date: 2010-07-22
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Published in 2010

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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 (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-00515919

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