City Research Online

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.

Publication Type:	Article
Additional Information:	This is the peer reviewed version of the following article: Favara, G., Schroth, E. & Valta, P. (2012). Strategic Default and Equity Risk Across Countries. The Journal of Finance, 67(6), pp. 2051-2095, which has been published in final form at http://dx.doi.org/10.1111/j.1540-6261.2012.01781.x. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance
SWORD Depositor:	Symplectic Administrator

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