Strategic Default, Debt Structure, and Stock Returns


Journal of Financial and Quantitative Analysis


Departments: Finance

Keywords: Debt Structure, Debt Renegotiation, Stock Returns

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