Strategic Default and Equity Risk Across Countries

Favara, Giovanni; Schroth, Enrique; Valta, Philip (2012). Strategic Default and Equity Risk Across Countries. Journal of Finance, 67(6), pp. 2051-2095. Wiley 10.1111/j.1540-6261.2012.01781.x

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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.

Item Type:

Journal Article (Original Article)

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Business Management > Institute of Financial Management

UniBE Contributor:

Valta, Philip

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

ISSN:

0022-1082

Publisher:

Wiley

Language:

English

Submitter:

Karin Dolder

Date Deposited:

10 Aug 2016 14:40

Last Modified:

10 Aug 2016 14:40

Publisher DOI:

10.1111/j.1540-6261.2012.01781.x

BORIS DOI:

10.7892/boris.85639

URI:

https://boris.unibe.ch/id/eprint/85639

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