Many studies use the book value of debt as a proxy for its market value because most corporate debt does not trade. I call this practice the book value of debt (BVD) approximation, and it appears to be justified by the observation that the average market value of debt is close to its book value. Many corporate bonds, however, trade at values significantly different from their book values, and consequently the BVD approximation can create important biases. I compare the accuracy of the BVD approximation to Merton's option pricing (OPT) model of corporate debt valuation, and find consistent evidence that the Merton model provides more accurate estimates. I also show that this model is an easily estimated alternative to the BVD approximation. In short, the BVD approximation not only creates significant biases, but it is also an unnecessary simplification.

We examine the underinvestment rationale for corporate hedging and test the hypothesis that if firms hedge to reduce both their reliance on external funds and the volatility of internal cash flow, then their investment spending should be less sensitive to prehedged cash flow. Our results are consistent with this hypothesis and indicate that investment spending is less sensitive to cash flow for hedgers than for nonhedgers. We also find that among hedgers, investment spending is less sensitive to cash flow when the extent of hedging is higher. Our results are generally robust to five different measures of cash flow.

We investigate the relation between outside director compensation and the investment opportunities of firms. The sample of cases is drawn from the period 1996 to 2001. We find that elements of outside director compensation are significantly related to the investment opportunity set. Firms with more investment opportunities pay a higher level of compensation to their outside directors than firms with fewer investment opportunities. In addition to paying more total compensation, firms with greater investment opportunities compensate directors more heavily with stock-based forms of compensation than with cash. The result is consistent with the hypothesis that board compensation policy is designed to: (1) attract directors whose marginal productivity interacts with the investment opportunities of the firm to produce the maximal gain, and (2) mitigate agency problems. We also document a positive relation between total compensation of outside directors and firm size. A separate analysis indicates the results are economically significant. We conclude that firms pay more and emphasize incentive-based compensation to motivate outside directors to act in the interests of shareholders when the costs of monitoring are high.

We examine 121 reverse takeovers (RT), in which a privately held firm acquires a publicly traded firm to obtain their exchange listing. The public firms, many of which went public during the initial public offering (IPO) bubble, are generally poor performers. Their shareholders receive significant wealth gains upon announcement, suggesting that these events may provide shareholders of distressed firms a way to recover some of their investment. We observe little post-event improvement in operations or profitability, and only 46% of the sample survives two years. Thus, while reverse takeovers provide alternative means of going public, they are risky and may fail to generate long-term wealth.