THE SECURITY PRICE EFFECTS OF PUBLIC DEBT DEFAULTS

Brian L. Betker

Journal of Financial Research, 1998, vol. 21, issue 1, 17-35

Abstract: A debt default requires a restructuring that may take place in or out of court. By examining security returns around a sample of public debt defaults, only some of which end in bankruptcy, I provide new evidence on the costs and benefits of bankruptcy compared with workouts. Evidence from security returns implies that bankruptcy is more costly than a workout, but that the cost differential is reduced for firms with large net operating loss carryforwards. The evidence is also consistent with the argument that equity has greater option value in a workout relative to bankruptcy.

Date: 1998
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