Strategic Behavior, Financing, and Stock Returns

In this paper I analyze how debt structure and the strategic interaction betweenshareholders and creditors in the event of default a¤ect expected stock returns. By en-dogenizing shareholders decision to default, the model generates new predictions linkingrm characteristics to expected stock returns through an intuitive economic mechanism.In particular, the model predicts that expected stock returns are higher for rms that facehigh debt renegotiation difficulties, and that have a large fraction of secured or convert-ible debt.

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Year of publication:	2008-08-01
Authors:	Valta, Philip
Institutions:	Swiss National Centre of Competence in Research North South <Bern>
Subject:	Strategie \| Verhandlung \| Kapitalgewinn \| capital gains \| Kapitalstruktur \| capital structure

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1 Introduction
2 Model and Empirical Predictions
2.1 Model Setup
2.2 Straight Debt
2.3 Secured Debt
2.4 Convertible Debt
3 Variables, Empirical Strategy, and Data
3.1 Variables
3.2 Identifying distressed rms
3.3 Empirical strategy
3.4 Data
3.5 Descriptive Statistics
4 Results
4.1 Fama and MacBeth Analysis
4.2 Portfolio Analysis
4.3 Discussion
5 Robustness and Further Evidence
5.1 Endogeneity Bias
5.2 Alternative Measures of Distress
6 Conclusions
7 Appendix 1
7.1 Straight debt
7.2 Secured Debt
7.3 Convertible Debt
8 Appendix 2
References

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