Debt enforcement, investment, and risk taking across countries

Favara, Giovanni; Morellec, Erwan; Schroth, Enrique; Valta, Philip (2017). Debt enforcement, investment, and risk taking across countries. Journal of Financial Economics, 123(1), pp. 22-41. North-Holland 10.1016/j.jfineco.2016.09.002

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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.

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:

0304-405X

Publisher:

North-Holland

Language:

English

Submitter:

Karin Dolder

Date Deposited:

14 Aug 2017 12:32

Last Modified:

14 Aug 2017 12:32

Publisher DOI:

10.1016/j.jfineco.2016.09.002

Uncontrolled Keywords:

Debt enforcement, Default, Investment, Asset sales, Risk-taking

BORIS DOI:

10.7892/boris.98605

URI:

https://boris.unibe.ch/id/eprint/98605

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