Bankcruptcy Law and Firms' Behavior

40 Pages Posted: 24 May 2007  

Anne Epaulard

Université Paris IX Dauphine

Aude Pommeret

University of Lausanne

Date Written: February 2006

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.

Keywords: Bankruptcy, capital structure, investment, real options

JEL Classification: G12, G32, G33

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: https://ssrn.com/abstract=987999

Anne Epaulard (Contact Author)

Université Paris IX Dauphine ( email )

223 Rue Saint-Honore
Paris, 75775
France

Aude Pommeret

University of Lausanne ( email )

Lausanne, Vaud CH-1015
Switzerland

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