Informational Role of Investment in Bankruptcy

57 Pages Posted: 17 Oct 2017 Last revised: 2 Jun 2020

See all articles by Ben Charoenwong

Ben Charoenwong

National University of Singapore - Department of Finance

Hyunsoo Doh

Nanyang Technological University

Yiyao Wang

Shanghai Advanced Institute of Finance

Date Written: October 24, 2019

Abstract

We develop a credit-risk model to study the informational role of investment in bankruptcy. Firms' investment decisions carry information about their asset quality, thereby mitigating informational frictions when firms enter bankruptcy. An increase in aggregate investment can reduce the informational value of investment, depressing firms' recovery values. Therefore, policies boosting investment can decrease debt and firm values through reducing the informational value of investment. The presence of debt overhang may enhance firm value by making firms' investment decisions more informative. We present suggestive empirical evidence consistent with model predictions on the relation between firms' investment rates and recovery rates.

Suggested Citation

Charoenwong, Ben and Doh, Hyunsoo and Wang, Yiyao, Informational Role of Investment in Bankruptcy (October 24, 2019). Available at SSRN: https://ssrn.com/abstract=3051798

Ben Charoenwong

National University of Singapore - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://bizfaculty.nus.edu/faculty-profiles/519-ben

Hyunsoo Doh (Contact Author)

Nanyang Technological University ( email )

Singapore

Yiyao Wang

Shanghai Advanced Institute of Finance ( email )

West Huaihai Road 211
Shanghai, Shanghai 200011
China

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