← Search

Journal of Financial Economics Vol. 123 No. 1 2017

Debt enforcement, investment, and risk taking across countries

Giovanni Favara1,2; Erwan Morellec3,4,5; Enrique Schroth6; Philip Valta3,7,8

1 Federal Reserve Board of Governors · 2 Federal Reserve · 3 Swiss Finance Institute · 4 Centre for Economic Policy Research · 5 École Polytechnique Fédérale de Lausanne · 6 City, University of London · 7 University of Bern · 8 University of Geneva

open access

Abstract

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 differences-in-differences analysis of firms’ investment and risk taking in response to bankruptcy reforms that make debt more renegotiable confirms the cross-country evidence.

DOI
10.1016/j.jfineco.2016.09.002
Volume
123
Issue
1
Pages
22-41
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite