Strategic Default and Equity Risk Across Countries

We show that the prospect of a debt renegotiation favorable to shareholders reduces the firm's equity risk. Equity beta and return volatility are lower in countries where the bankruptcy code favors debt renegotiations and for firms with more shareholder bargaining power relative to debt holders. These relations weaken as the country's insolvency procedure favors liquidations over renegotiations. In the limit, when debt contracts cannot be renegotiated, equity risk is independent of shareholders' incentives to default strategically. We argue that these findings support the hypothesis that the threat of strategic default can reduce the firm's equity risk

Public procurement mechanisms for public-private partnerships

Why do some countries (often developing and emerging economies) adopt special laws on PPP, whilst in others PPPs are governed by the legislation on public procurement and related bylaws? This paper explains the above global discrepancies from an institutional perspective. In a contract-theoretical framework we demonstrate how PPPs can enable projects that are not feasible through standard public procurement arrangements. Incentives for private partners are created through extra benefits (often non-contractible) from their collaboration with the government (e.g. risk reduction, reputational gains, access to additional resources, lower bureaucratic burden, etc.). In a well-developed institutional environment these benefits are implicitly guaranteed, suggesting no need in a specialized PPP-enabling legislation. Otherwise, a PPP law should establish an institutional architecture to provide the above benefits.</jats:p