Abstract

http://ssrn.com/abstract=987999
 
 

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Bankcruptcy Law and Firms' Behavior


Anne Epaulard


Université Paris IX Dauphine

Aude Pommeret


University of Lausanne

February 2006

Swiss Finance Institute Research Paper No. 07-08

Abstract:     
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. Shareholders and 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.

Number of Pages in PDF File: 40

Keywords: Bankruptcy, capital structure, investment, real options

JEL Classification: G12, G32, G33

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Date posted: May 24, 2007  

Suggested Citation

Epaulard, Anne and Pommeret, Aude, Bankcruptcy Law and Firms' Behavior (February 2006). Swiss Finance Institute Research Paper No. 07-08. Available at SSRN: http://ssrn.com/abstract=987999

Contact Information

Anne Epaulard (Contact Author)
Université Paris IX Dauphine ( email )
223 Rue Saint-Honore
Paris, 75775
France
Aude Pommeret
University of Lausanne ( email )
Lausanne, 1015
Switzerland
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