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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.

Suggested Citation

  • Anne Epaulard & Aude Pommeret, 2007. "Bankcruptcy Law and Firms’ Behavior," Swiss Finance Institute Research Paper Series 07-08, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp0708

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    Cited by:

    1. Dan Andrews & Chiara Criscuolo, 2013. "Knowledge-Based Capital, Innovation and Resource Allocation," OECD Economics Department Working Papers 1046, OECD Publishing.

    More about this item


    Bankruptcy; capital structure; investment; real options;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation


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