Collateral Value and Strategic Default: Evidence from Auto Loans

AbstractThis 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.

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Strategic Default and Equity Risk Across Countries

The Journal of Finance ◽

10.1111/j.1540-6261.2012.01781.x ◽

2012 ◽

Vol 67 (6) ◽

pp. 2051-2095 ◽

Cited By ~ 56

Author(s):

GIOVANNI FAVARA ◽

ENRIQUE SCHROTH ◽

PHILIP VALTA

Keyword(s):

Equity Risk ◽

Strategic Default

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Confidence banking and strategic default

Journal of Monetary Economics ◽

10.1016/j.jmoneco.2018.07.010 ◽

2018 ◽

Vol 100 ◽

pp. 101-113 ◽

Cited By ~ 7

Author(s):

Guillermo Ordoñez

Keyword(s):

Strategic Default

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Optimal Financial Exclusion

American Economic Journal Microeconomics ◽

10.1257/mic.20190005 ◽

2021 ◽

Vol 13 (4) ◽

pp. 101-134

Author(s):

Cyril Monnet ◽

Erwan Quintin

Keyword(s):

Steady State ◽

Equilibrium Path ◽

Stationary Equilibrium ◽

Benchmark Model ◽

Strategic Default ◽

Financial Exclusion ◽

Natural Variations

We study efficient exclusion policies in a canonical credit model that features both exogenous and strategic default along the equilibrium path. Policies that maximize welfare in a stationary equilibrium implement exclusion for a finite and deterministic number of periods following default. Front-loading exclusion makes the mass of socially valuable transactions as high as it can be in steady state. Less intuitively, doing so also maximizes the average welfare of excluded agents in equilibrium conditional on the level of incentives provided by the threat of exclusion. We argue that these results are robust to a host of natural variations on our benchmark model. (JEL C73, D53, D86, G21, G32, G51)

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