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Strategic Default and Equity Risk Across Countries

Schroth, Enrique
Favara, Giovanni
Published in Journal of Finance. 2012, vol. 67, no. 6, p. 2051-2095
Abstract 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.
Keywords Debt enforcementStrategic defaultLiquidation costsEquity risk
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VALTA, Philip, SCHROTH, Enrique, FAVARA, Giovanni. Strategic Default and Equity Risk Across Countries. In: Journal of Finance, 2012, vol. 67, n° 6, p. 2051-2095. doi: 10.1111/j.1540-6261.2012.01781.x https://archive-ouverte.unige.ch/unige:73275

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Deposited on : 2015-06-22

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