49 Pages Posted: 10 Jan 2014 Last revised: 15 Sep 2016
Date Written: March 3, 2016
We argue that the prospect of an imperfect enforcement of debt contracts in default reduces shareholder-debtholder conflicts and induces leveraged firms to invest more and take on less risk as they approach financial distress. To test these predictions, we use a large panel of firms in 41 countries with heterogeneous debt enforcement characteristics. Consistent with our model, we find that the relation between debt enforcement and firms' investment and risk depends on the firm-specific probability of default. A difference-in-differences analysis of firms' investment and risk taking in response to bankruptcy reforms that make debt more renegotiable confirms the cross-country evidence.
Keywords: Debt renegotiation, Default; Investment , Asset sales, Risk-taking
JEL Classification: G31, G32, G33
Suggested Citation: Suggested Citation
Favara, Giovanni and Morellec, Erwan and Schroth, Enrique J. and Valta, Philip, Debt Enforcement, Investment, and Risk Taking Across Countries (March 3, 2016). Journal of Financial Economics (JFE), Forthcoming; Swiss Finance Institute Research Paper No. 13-64. Available at SSRN: https://ssrn.com/abstract=2377253 or http://dx.doi.org/10.2139/ssrn.2377253