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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

    (UNIL - Université de Lausanne = University of Lausanne)

  • Enrique Schroth

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

Abstract

We test whether the firm's systematic equity risk reflects the shareholders' incentives to default strategically on the firm's debt. We use a real options model to relate the shareholders' strategic default behavior to frictions in the debt renegotiation procedure. We test the model's predictions with an international cross-section of stocks, exploiting the exogenous cross-country variation of bankruptcy procedures. We find that the equity beta increases as debt is more strictly enforced. Moreover, the equity beta decreases with liquidation costs and shareholders' bargaining power, and the sensitivity of this relation weakens as the country's debt renegotiation procedures become more creditor friendly.

Suggested Citation

  • Philip Valta & Giovanni Favara & Enrique Schroth, 2010. "Strategic Default and Equity Risk Across Countries," Working Papers hal-00515919, HAL.
    • Handle: RePEc:hal:wpaper:hal-00515919
    as

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