[We develop a model wherein the choice between adjustable- and fixed-rate debt can serve as a signal of firm quality. The nature of the signal depends on expected inflation volatility relative to other risk parameters. Evidence from a matched sample of debt announcements over the period 1978 to 1986 shows a difference of -2.05 percent between stock price reactions to adjustable rate and fixed rate announcements when expected inflation volatility is above an estimated threshold. Below this threshold, the difference is +0.98 percent. The evidence supports the hypothesis that the riskier debt choice serves as a favorable signal of firm quality.]

The authors document the determinants of the term to maturity of 7,369 bonds and notes issued between 1982 and 1993. Their main finding is that large firms with investment grade credit ratings typically borrow at the short end and at the long end of the maturity spectrum, while firms with speculative grade credit ratings typically borrow in the middle of the maturity spectrum. This pattern is consistent with the theory that risky firms do not issue short-term debt in order to avoid inefficient liquidation, but are screened out of the long-term debt market because of the prospect of risky asset substitution.

[We show that, in the presence of correlated investment opportunities across firms, risk sharing between firm shareholders and firm managers leads to compensation contracts that include relative performance evaluation. These contracts bias investment choices toward correlated investment opportunities, and thus create systemic risk. Furthermore, we show that leverage amplifies all such effects. In the context of the banking industry, we analyze recent policy recommendations for firm managerial pay and show how shareholders optimally undo the policies’ intended effects.]

We develop a model wherein the choice between adjustable- and fixed-rate debt can serve as a signal of firm quality. The nature of the signal depends on expected inflation volatility relative to other risk parameters. Evidence from a matched sample of debt announcements over the period 1978 to 1986 shows a difference of - 2.05 \ \rm percent between stock price reactions to adjustable rate and fixed rate announcements when expected inflation volatility is above an estimated threshold. Below this threshold, the difference is +0.98 \ \rm percent. The evidence supports the hypothesis that the riskier debt choice serves as a favorable signal of firm quality.

This paper presents a reputation model of divestiture activity that yields a sharp cross-sectional implication for event studies of sell-off announcements: A decision to divest a division that is known to be successful conveys good news about the division; in contrast, a decision to divest a division that is known for underperformance conveys no news about the division. We test these hypotheses on a sample of sell-off announcements for which we find stories in the Wall Street Journal unambiguously characterizing the division being sold as either a “winner” or a “loser”. The stock price reaction to the sell-off of losers is indistinguishable from zero while the stock price reaction to the sell-off of winners is a statistically significant 2.5%. These results are strengthened when we expand the sample to include divisions whose profitability was announced in the company's annual report. For this expanded sample, the average stock price reaction to the announcements of sell-offs of losers remains indistinguishable from zero, while returns from the sell-offs of winners average a highly significant 3.4%.

We document the determinants of the term to maturity of 7,369 bonds and notes issued between 1982 and 1993. Our main finding is that large firms with investment grade credit ratings typically borrow at the short end and at the long end and of the maturity spectrum, while firms with speculative grade credit ratings typically borrow in the middle of the maturity spectrum. This pattern is consistent with the theory that risky firms do not issue short-term debt in order to avoid inefficient liquidation, but are screened out of the long-term debt market because of the prospect of risky asset substitution.

We document the determinants of the term to maturity of 7,369 bonds and notes issued between 1982 and 1993. Our main finding is that large firms with investment grade credit ratings typically borrow at the short end and at the long end and of the maturity spectrum, while firms with speculative grade credit ratings typically borrow in the middle of the maturity spectrum. This pattern is consistent with the theory that risky firms do not issue short‐term debt in order to avoid inefficient liquidation, but are screened out of the long‐term debt market because of the prospect of risky asset substitution.

Pete Clarkson, Jose Guedes, Rex Thompson, On the Diversification, Observability, and Measurement of Estimation Risk, The Journal of Financial and Quantitative Analysis, Vol. 31, No. 1 (Mar., 1996), pp. 69-84

We show that, in the presence of correlated investment opportunities across firms, risk sharing between firm shareholders and firm managers leads to compensation contracts that include relative performance evaluation. These contracts bias investment choices toward correlated investment opportunities, and thus create systemic risk. Furthermore, we show that leverage amplifies all such effects. In the context of the banking industry, we analyze recent policy recommendations for firm managerial pay and show how shareholders optimally undo the policies’ intended effects. Received October 31, 2017; editorial decision August 21, 2018 by Editor Wei Jiang.