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Debt enforcement, investment, and risk taking across countries

Favara, Giovanni
Morellec, Erwan
Schroth, Enrique
Published in Journal of Financial Economics. 2017, vol. 123, no. 1
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 difference-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 renegotiationDefaultInvestmentAsset salesRisk-taking
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FAVARA, Giovanni et al. Debt enforcement, investment, and risk taking across countries. In: Journal of Financial Economics, 2017, vol. 123, n° 1. https://archive-ouverte.unige.ch/unige:87915

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Deposited on : 2016-10-03

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