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We examine the default probabilities predicted by " structural " models of risky corporate debt. Two types of models are examined: those with " exogenous " default boundaries, typified by Longstaff and Schwartz (1995); and those with " endogenous " default boundaries, typified by Leland and Toft (1996). We focus on default probabilities rather than credit(More)
This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting galley proof before it is published in its final citable form. Please note that during the production(More)
* We would like to thank Adlai Fisher for sharing his understanding of Markov switching models with us. We are grateful for comments from Costis Skiadas, the WFA discussant and Abstract Much empirical work indicates that there are common factors that drive the equity risk premium and credit spreads. In this paper, we embed a structural model of credit risk(More)
In the neoclassical theory of the firm, actions are taken to maximize the present value of the firm's cash flows-there is no role for managerial attitudes in forming corporate policies. In contrast, our paper provides striking evidence that links psychological traits such as managerial risk aversion, time preference, and optimism to corporate financial(More)
The views expressed are those of the authors and do not necessarily reflect the views of the Bank of Finland and Federal Reserve Board. China for helpful suggestions. Tables showing some additional robustness checks are available upon request from the authors. Abstract China is reforming its banking system, partially privatizing and permitting minority(More)
Using mutual fund redemptions as an instrument for price changes, we identify a strong effect of market prices on takeover activity (the " trigger effect "). An interquar-tile decrease in valuation leads to a seven percentage point increase in acquisition likelihood, relative to a 6% unconditional takeover probability. Instrumentation addresses the fact(More)
Explicit presence of reorganization in addition to liquidation leads to conf licts of interest between borrowers and lenders. In the first–best outcome, reorganization adds value to both parties via higher debt capacity, lower credit spreads, and improved overall firm value. If control of the ex ante reorganization timing and the ex post decision to(More)
This paper develops a real options framework to analyze the behavior of stock returns in mergers and acquisitions. In this framework, the timing and terms of takeovers are endogenous and result from value-maximizing decisions. The implications of the model for abnormal announcement returns are consistent with the available empirical evidence. In addition,(More)
We provide evidence that the positive relation between firm-level stock returns and firm-level return volatility is due to firms' real options. Consistent with real option theory, we find that the positive volatility-return relation is much stronger for firms with more real options and that the sensitivity of firm value to changes in volatility declines(More)
Miscalibration is a form of overconfidence examined in both psychology and economics. Although it is often analyzed in lab experiments, there is scant evidence about the effects of miscalibration in practice. We test whether top corporate executives are miscalibrated, and study the determinants of their miscalibration. We study a unique panel of over 11,600(More)