This paper considers the capital structure and debt maturity choice for a value-maximizing corporation. In the model, interest expense is tax deductible, bankruptcy is costly, and debt is fairly priced at issue. In contrast to the results of Kane, Marcus, and McDonald (1985), optimal debt maturity does not always approach zero in the absence of transaction costs, and is increasing in the volatility of the assets of the firm. The model predicts a positive association between the value of leverage and total risk in some circumstances.

This paper demonstrates that the market reaction to announcements of seasoned stock offerings varies with the presence of outside agents - accounting firms, commercial banks, and underwriters - who monitor the firm. The stock price reaction is a positive function of the quantity of bank debt in a firm's financial structure, the quality of the firm's investment banker, and the quality of the public accounting firm that serves as its external auditor. The evidence supports theoretical models that imply external agents audit, monitor, and certify decisions to issue seasoned common stock.

For a random sample of 83 firms, we show that public and private debt agreements filed at the SEC yield a more comprehensive set of accounting constraints than annual reports or Moody's. For firms with accounting constraints, measures of proximity to leverage, net worth, and working capital constraints are significantly correlated to leverage. We incorporate constraint-related data into Zmijewski and Hagerman's (1981) income strategy model. Both a leverage constraint indicator and leverage are significantly associated with accounting choice. This suggests that leverage is proxying for factors in addition to the existence of accounting-based constraints.

[A binomial approximation to a diffusion is defined as "computationally simple" if the number of nodes grows at most linearly in the number of time intervals. It is shown how to construct computationally simple binomial processes that converge weakly to commonly employed diffusions in financial models. The convergence of the sequence of bond and European option prices from these processes to the corresponding values in the diffusion limit is also demonstrated. Numerical examples from the constant elasticity of variance stock price and the Cox, Ingersoll, and Ross (1985) discount bond price are provided.]

We examine the behavior of common stock prices after a large change in price occurs during a single trading day and find evidence that the stock market appears to have overreacted, especially in the case of price declines; however, the magnitude of the overreaction is small compared to the bid-ask spreads observed for the individual stocks in the sample. We interpret this finding as being consistent with a market that is efficient after transactions costs are considered.

Greenmail payments are widely viewed as actions designed by managers to perpetuate their tenure in office. This view, which suggests that greenmail prohibitions would enhance shareholder wealth, receives mixed empirical support in this paper. The average market reaction to charter amendments prohibiting greenmail payments is weakly negative, suggesting there is a value to maintaining managerial flexibility. Nonlinear maximum likelihood estimation, however, reveals a strong positive correlation between the market reaction and the firm's abnormal stock price runup over the three months just prior to the proxy mailing date. For the subsample of firms with a relatively large prior runup, the precommitment not to pay greenmail is value enhancing. If the prior runup reflects takeover rumors, then this evidence is consistent with the proposition that greenmail payments amidst takeover speculations are value decreasing.

[Studies in psychology have reported that subjects tend to overestimate the likelihood of a hypothesized cause because they do not generate or consider an adequate set of alternative explanations. These findings have been reported in non-auditing domains. This study investigates the effect of alternative explanations on experienced auditors' analytical review judgments. In this article, I view analytical review as a diagnostic process that involves the generation and evaluation of hypothesized causes of unusual fluctuations in financial statement relations. In this diagnostic process, hypothesized causes are used to direct auditors' search for information. Auditors from two Big Eight accounting firms participated in two experiments conducted to examine whether making alternative explanations available to auditors reduces their initial assessments of the likelihood of a hypothesized cause. The effect of varying the number and strength of alternatives was also examined. The results of the first experiment show a decrease in the assessed likelihood of a hypothesized cause when alternative explanations are provided to auditors. Results of the second experiment show that varying the number of alternative explanations influenced the degree of reduction in such likelihood assessments, but varying the strength of alternatives had no effect. Overall, the results of this study could lead to improved audit efficiency and effectiveness.]

Discusses auditors' assessments of the likelihood of error explanations in analytical review of financial statement relations. Role of alternative explanations; Number and strength of alternatives; Errors used as alternative explanations; Strength-ranking tasks.

[Event studies often include cross-sectional regressions of announcement effects on exogenous variables. If the event is voluntary and investors are rational, then standard OLS and GLS estimators are inconsistent. Consistent ML estimators are constructed for a cross-sectional model of horizontal mergers relating announcement effects to exogenous characteristics of firms and industries. The OLS and ML estimates differ dramatically for bidders but not for targets. The evidence suggests that managers of bidders, but not targets, have valuable private information about the potential synergies from proposed mergers.]