Bankruptcy Law and Firms' Behavior

38 Pages Posted: 5 Mar 2005

See all articles by Anne Epaulard

Anne Epaulard

Université Paris IX Dauphine

Aude Pommeret

University of Lausanne

Date Written: February 2005

Abstract

The aim of this paper is to study the impact of bankruptcy law on financing, investment, default and liquidation decisions of firms. We build a model in which a firm can finance its investment by issuing debt. The investment is risky. Because of risk, the firm may default. The firm manager takes investment and default decisions in order to maximize the value of equities. Before investment takes place, shareholders and bondholders bargain over the share of the investment that is financed trough debt and the annual coupon. If it occurs, at default the firm enters an observation period after which the decision of liquidation or continuation is taken. The model is solved and 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 parameters that summarize the bankruptcy procedure.

Keywords: Bankruptcy, capital structure, investment, real options

JEL Classification: G12, G32, G33

Suggested Citation

Epaulard, Anne and Pommeret, Aude, Bankruptcy Law and Firms' Behavior (February 2005). Available at SSRN: https://ssrn.com/abstract=676623 or http://dx.doi.org/10.2139/ssrn.676623

Anne Epaulard

Université Paris IX Dauphine ( email )

223 Rue Saint-Honore
Paris, 75775
France

Aude Pommeret (Contact Author)

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

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