The literature develops the theoretical rationale for the Value of Tax Shields (VTS) on the following misguided basis: it uses required rate of return on assets (or WACC) as the discount rate for capitalization, it uses expected rate of return on assets (ROA¯ or ROI¯) as a proxy for WACC, and it is not aware of (1) the influence of the difference between “expected rate of return on equity” and “Required rate of Return On Equity (RROE)” on VTS, (2) the fact that RROE is equity normal profit which is not measurable, (3) the economic content of the weight attached to the VTS capacity, and (4) the co-definition of “tax shield and leverage return.” This paper takes tax shields and leverage return as a system and provides a knife, “interest rate/ROI=Cost/Price”, to slice the VTS capacity into “earned VTS” and “unearned VTS.” Earned VTS is VTS. Unearned VTS is the value of leverage return, because leverage return is tax payable.

A number of studies have investigated the causes and effects of stock market crashes. These studies mainly focus on the factors leading to a crash and on the volatility and co-movements of stock market indexes during and after the crash. However, how a stock market crash affects individual stocks and if stocks with different financial characteristics are affected differently in a stock market crash is an issue that has not received sufficient attention. In this paper, we study this issue by using data for eight major stock market crashes that have taken place during the December 31, 1962–December 31, 2007 period with a large sample of US firms. We use the event-study methodology and multivariate regression analysis to study the determinants of stock returns in stock market crashes.

We examine whether the financial market charged a default risk premium to US Treasury securities when the US Federal government repeatedly reached the legally binding debt limits between 2002 and 2006. We show that for the first two of the four recurrences since the first episode in 1996, the financial market charged a small default risk premium to the Treasury securities. However, we find no significant evidence of a pricing effect in the last two recurrences. The results suggest that the financial market gradually perceived the budget standoffs as the boy who cried wolf.

This paper examines the effects of default risk, call risk, and their interactions on bond duration. We find that call risk decreases durations of default-free bonds, while default risk alone generally decreases durations for risky bonds with only a few exceptions. The joint effect of default and call risk always results in shorter durations for corporate bonds. Controlling for the effect of default risk, call risk has a negative effect on duration, which diminishes as bond ratings decline. Finally, the effect of call risk on duration depends on bond characteristics. Empirical evidence shows that the effect of call risk is smaller for discount bonds and for deep-discount fallen angels.

This study examines how the Chinese state-owned banks allocate loans to private firms. We find that the banks extend loans to financially healthier and better-governed firms, which implies that the banks use commercial judgments in this segment of the market. We also find that having the state as a minority owner helps firms obtain bank loans and this suggests that political connections play a role in gaining access to bank finance. In addition, we find that commercial judgments are important determinants of the lending decisions for manufacturing firms, large firms, and firms located in regions with a more developed banking sector; political connections are important for firms in service industries, large firms, and firms located in areas with a less developed banking sector.