40 Pages Posted: 24 May 2007
Date Written: February 2006
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: 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