Strategic Default, Debt Structure, and Stock Returns

56 Pages Posted: 6 Mar 2008 Last revised: 26 Feb 2014

Date Written: February 26, 2014

Abstract

This paper theoretically and empirically investigates how the debt structure and the strategic interaction between shareholders and debt holders in the event of default affect expected stock returns. The model predicts that expected stock returns are higher for firms that face high debt renegotiation difficulties and that have a large fraction of secured or convertible debt. Using a large sample of publicly traded US firms between 1985 and 2012, the paper presents new evidence on the link between debt structure and stock returns that is supportive of the model's predictions.

Keywords: Debt Structure, Debt Renegotiation, Stock Returns

JEL Classification: G13, G32, G33

Suggested Citation

Valta, Philip, Strategic Default, Debt Structure, and Stock Returns (February 26, 2014). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1101534 or http://dx.doi.org/10.2139/ssrn.1101534

Philip Valta (Contact Author)

University of Bern ( email )

Engehaldenstrasse 4
Bern, 3012
Switzerland

HOME PAGE: http://https://www.ifm.unibe.ch/about_us/people/prof_dr_valta_philip/

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