We examine the effect of introducing credit default swaps (CDSs) on firm value. Our model allows for dynamic investment and financing, and bondholders can trade in the CDS market. The model incorporates both negative and positive effects of CDSs. CDS markets lead to more liquidations, but they also reduce the probability of costly debt renegotiation and reduce costly equity financing. After calibrating the model, we find that firm value increases by 2.9% on average with the introduction of a CDS market. Firms also invest more and increase leverage. The effect on firm value is strongest for small, financially constrained, and low productivity firms.

We analyze the economic and financial impact of right-to-work (RTW) laws in the US. Using data from collective bargaining agreements, we show that there is a decrease in wages for unionized workers after RTW laws. Firms increase investment and employment but reduce financial leverage. Labor-intensive firms experience higher profits and labor-to-asset ratios. Dividends and executive compensation also increase post-RTW. Our results are consistent with a canonical theory of the firm augmented with an exogenous bargaining power of labor and suggest that RTW laws impact corporate policies by decreasing that bargaining power.

We revisit the well-established puzzle that leverage is negatively correlated with measures of profitability. In contrast, we find that at times when firms are at or close to their optimal level of leverage, the cross-sectional correlation between profitability and leverage is positive. At other times, it is negative. These results are consistent with dynamic trade-off models in which infrequent capital structure rebalancing is optimal. The time series of market leverage and profitability in the quarters prior to rebalancing events match the patterns predicted by these models. Our results are not driven by investment layouts, market timing, payout, or mechanical mean reversion of leverage.