Debt enforcement, investment, and risk taking across countries

Giovanni Favara, Erwan Morellec, Enrique Schroth and Philip Valta

Journal of Financial Economics, 2017, vol. 123, issue 1, 22-41

Abstract: We argue that the prospect of an imperfect enforcement of debt contracts in default reduces shareholder–debtholder conflicts and induces leveraged firms to invest more and take on less risk as they approach financial distress. To test these predictions, we use a large panel of firms in 41 countries with heterogeneous debt enforcement characteristics. Consistent with our model, we find that the relation between debt enforcement and firms’ investment and risk depends on the firm-specific probability of default. A differences-in-differences analysis of firms’ investment and risk taking in response to bankruptcy reforms that make debt more renegotiable confirms the cross-country evidence.

Keywords: Debt enforcement; Default; Investment; Asset sales; Risk-taking (search for similar items in EconPapers)
JEL-codes: G31 G32 G33 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (62)

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Related works:
Working Paper: Debt Enforcement, Investment, and Risk Taking Across Countries (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:123:y:2017:i:1:p:22-41

DOI: 10.1016/j.jfineco.2016.09.002

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