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Bankcruptcy Law and Firms’ Behavior

  • Anne Epaulard

    (University of Paris Dauphine and Cepremap)

  • Aude Pommeret

    (University of Lausanne and Ires)

The aim of this paper is to study the impact of the bankruptcy law on financing, investment, default and liquidation decisions of firms. We build a model in which the firm has the opportunity to get into debt to finance an investment whose return is stochastic. Shareholdersand bondholders bargain the amount of debt and the level of the coupon. Because of uncertainty, the firm may default. The firm manager takes investment and default decisions in order to maximize the value of equity. At default, the firm enters an observation period after which it is decided whether it liquidates or goes on with production. The model is calibrated in order to reproduce French firms characteristics. We then study the effect on financing, investment, default and liquidation decisions of the firms, of changes in the representative parameters of the bankruptcy procedure.

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Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 07-08.

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Length: 37 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:chf:rpseri:rp0708
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