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Strategic Default and Equity Risk Across Countries

Author

Listed:
  • Philip Valta

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Giovanni Favara
  • Enrique Schroth

    (UvA - University of Amsterdam [Amsterdam] = Universiteit van Amsterdam)

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.

Suggested Citation

  • Philip Valta & Giovanni Favara & Enrique Schroth, 2012. "Strategic Default and Equity Risk Across Countries," Post-Print hal-00758528, HAL.
    • Handle: RePEc:hal:journl:hal-00758528
    DOI: 10.1111/j.1540-6261.2012.01781.x
    as

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