This paper empirically tests five structural models of corporate bond pricing: those of Merton (1974), Geske (1977), Leland and Toft (1996), Longsta# and Schwartz (1995), and Collin-Dufresne and Goldstein (2001). We implement the models using a sample of 182 bond prices from firms with simple capital structures during the period 1986-1997. The conventional wisdom is that structural models do not generate spreads as high as those seen in the bond market, and true to expectations we find that the predicted spreads in our implementation of the Merton model are too low. However, most of the other structural models predict spreads that are too high on average. Nevertheless, accuracy is a problem, as the newer models tend to severely overstate the credit risk of firms with high leverage or volatility and yet su#er from a spread underprediction problem with safer bonds. The Leland and Toft model is an exception in that it overpredicts spreads on most bonds, particularly those with high coupons. More accurate structural models must avoid features that increase the credit risk on the riskier bonds while scarcely a#ecting the spreads of the safest bonds.

This paper examines to what extent credit ratings directly affect capital structure decisions. The paper outlines discrete costs/benefits associated with firm credit rating level differences, and tests whether concerns for these costs/benefits directly affect debt and equity financing decisions. The tests find that firms near a rating upgrade or downgrade issue less debt relative to equity than firms not near a rating change. This behavior is consistent with discrete costs/benefits of rating changes, but not explained by traditional capital structure theories. The results persist in the context of previous empirical tests of the pecking order and tradeoff capital This paper examines to what extent credit ratings directly affect capital structure decision making by financial managers. The paper outlines the reasons why credit ratings may be relevant for managers in the capital structure decision process, and then empirically tests the extent to which credit rating concerns directly impact managers ’ debt and equity decisions. The paper also

David Yermack, Greg Udell, and especially the anonymous referee for useful discussions and comments. We also would like to thank Amar Gande and Jayanthi Sunder for help in collecting and organizing the data, and Edward Altman for several helpful discussions on the ratings process.

Market discipline is an article of faith among financial economists, and the use of market discipline as a regulatory tool is gaining credibility. Effective market discipline involves two distinct components: security holders ’ ability to accurately assess the condition of a firm (“monitoring”) and their ability to cause subsequent managerial actions to reflect those assessments (“influence”). Substantial evidence supports the existence of market monitoring. However, little evidence exists on market influence, and then only for stockholders and for rare events such as management turnover. This paper seeks evidence that U.S. bank holding companies ’ security price changes reliably influence subsequent managerial actions. Although we identify some patterns consistent with beneficial market influences, we have not found strong evidence that stock or (especially) bond investors regularly influence managerial actions. Market influence remains, for the moment, more a matter of faith than of empirical evidence.

The views expressed in this paper are those of the authors, not necessarily those of the Federal Reserve

This paper examines implications from boundedly rational agents models, by investigating the relation between returns following earnings announcements (post-earnings announcement drift) and divergence of opinions among investors. We proxy for divergent opinions with the quantity of volume at the earnings date that is unexpected. Post-announcement returns are increasing in unexpected volume. Our evidence is consistent with Varian (1985) who suggests that opinion divergence may be treated as an additional risk factor affecting asset prices.