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Strategic Default, Debt Structure, and Stock Returns

Published online by Cambridge University Press:  03 March 2016

Philip Valta
Philip Valta*
Affiliation:
[email protected], University of Geneva, Swiss Finance Institute, 1211 Geneva, Switzerland.
*
*Corresponding author: [email protected]
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Abstract

This paper theoretically and empirically investigates how debt structure and strategic interaction among 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 U.S. firms for the period 1985–2012, the paper presents new evidence on the link between debt structure and stock returns that is supportive of the model’s predictions.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 1 , February 2016 , pp. 197 - 229
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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