We examine the accuracy and contribution of the Merton distance to default (DD) model, which is based on Merton's (1974) bond pricing model. We compare the model to a “naïve” alternative, which uses the functional form suggested by the Merton model but does not solve the model for an implied probability of default. We find that the naïve predictor performs slightly better in hazard models and in out-of-sample forecasts than both the Merton DD model and a reduced-form model that uses the same inputs. Several other forecasting variables are also important predictors, and fitted values from an expanded hazard model outperform Merton DD default probabilities out of sample. Implied default probabilities from credit default swaps and corporate bond yield spreads are only weakly correlated with Merton DD probabilities after adjusting for agency ratings and bond characteristics. We conclude that while the Merton DD model does not produce a sufficient statistic for the probability of default, its functional form is useful for forecasting defaults.

We examine whether constraints on public firms affect firms' efficiency by testing if going private improves plant-level productivity relative to peer control groups. We find that, despite increases in productivity after going private, there is little evidence of efficiency gains relative to peer groups of plants constructed to control for industry, age, size, past productivity, and the endogeneity of the going-private decision. Going-private firms do extensively restructure their portfolio of plants, selling and closing plants more quickly than others. Our findings cast doubt on the view that public markets cause listed firms to operate plants less efficiently due to overinvestment but indicate that going private increases restructuring activity.

[We investigate how firms weigh the costs and benefits of being public in the decision to opt out of the public market and go private. We draw on previous studies of going private and on the subsequent well-developed theoretical literature on why firms go public to develop our hypotheses. We employ a comprehensive sample of going-private transactions from 1980 to 2004 in the United States and examine how these firms differ over their public life (from IPO to going private) relative to a sample of firms that went and remained public. Our results provide strong support for the importance of information and liquidity considerations in being a public firm. These factors are evident at the IPO, on average thirteen years before the going-private decision. Access to capital and control considerations become increasingly important in the choice of going private over the public life of the firm.]

We investigate how firms weigh the costs and benefits of being public in the decision to opt out of the public market and go private. We draw on previous studies of going private and on the subsequent well-developed theoretical literature on why firms go public to develop our hypotheses. We employ a comprehensive sample of going-private transactions from 1980 to 2004 in the United States and examine how these firms differ over their public life (from IPO to going private) relative to a sample of firms that went and remained public. Our results provide strong support for the importance of information and liquidity considerations in being a public firm. These factors are evident at the IPO, on average thirteen years before the going-private decision. Access to capital and control considerations become increasingly important in the choice of going private over the public life of the firm.

[Using a novel information asymmetry index based on measures of adverse selection developed by the market microstructure literature, we test whether information asymmetry is an important determinant of capital structure decisions, as suggested by the pecking order theory. Our index relies exclusively on measures of the market's assessment of adverse selection risk rather than on ex ante firm characteristics. We find that information asymmetry does affect the capital structure decisions of U. S. firms over the sample period 1973-2002. Our findings are robust to controlling for conventional leverage factors (size, tangibility, Q ratio, profitability), the sources of firms' financing needs, and such firm attributes as stock return volatility, stock turnover, and intensity of insider trading. For example, we estimate that on average, for every dollar of financing deficit to cover, firms in the highest adverse selection decile issue 30 cents of debt more than firms in the lowest decile. Overall, this evidence explains why the pecking order theory is only partially successful in explaining all of firms' capital structure decisions. It also suggests that the theory finds support when its basic assumptions hold in the data, as should reasonably be expected of any theory.]

We examine whether natural disaster experiences affect households’ portfolio choice decisions. Using data from the National Longitudinal Survey of Youth 1979, we find that adversely affected households are less likely to participate in risky asset markets. After a disaster shock, households become more risk-averse and lower their expectations on future stock market returns. Such conservative portfolio choices persist even after households relocate to less disaster-prone areas, consistent with risk preferences being altered by disaster experiences. Overall, our evidence suggests that transient but salient experiences can be an important factor in explaining the limited participation puzzle.

This paper examines how external governance pressure affects the type of debt that firms issue. Consistent with a governance mechanism substitution effect, we find that an exogenous increase (decrease) in governance pressure from the product (takeover) market has a significant negative (positive) impact on the use of bank (public debt) financing over public debt (bank loan) issuance. Tests using changes in the strictness of loan covenants provide corroborative evidence. These findings are consistent with the notion that firms endogenously substitute governance mechanisms and that demand for creditor governance depends on the relative strength of alternative external governance mechanisms. Received May 18, 2016; editorial decision November 11, 2017 by Editor David Denis.

[We find that repeated borrowing from the same lender translates into a 10—17 bps lowering of loan spreads and that relationships are especially valuable when borrower transparency is low. These results hold using multiple approaches (propensity score matching, instrumental variables, and treatment effects model) that control for the endogeneity of relationships. We also provide a demarcation line between relationship and transactional lending. Spreads charged for relationship loans and nonrelationship loans are statistically identical if the borrower is in the largest 30% by asset size; has public rated debt; or is part of the S&P 500 index. Past relationships reduce collateral requirements and are also associated with obtaining larger loans. Our results imply that, even for firms that have multiple sources of outside financing, borrowing from a prior lender obtains better loan terms.]

We examine whether constraints on public firms affect firms' efficiency by testing if going private improves plant-level productivity relative to peer control groups. We find that, despite increases in productivity after going private, there is little evidence of efficiency gains relative to peer groups of plants constructed to control for industry, age, size, past productivity, and the endogeneity of the going-private decision. Going-private firms do extensively restructure their portfolio of plants, selling and closing plants more quickly than others. Our findings cast doubt on the view that public markets cause listed firms to operate plants less efficiently due to overinvestment but indicate that going private increases restructuring activity.

Firms with greater shareholder rights have a greater risk-shifting incentive, requiring more lender monitoring. Thus, a reduction in shareholder rights implies more diffused (less monitoring-intensive) loan syndicates. Using the passage of U.S. second-generation antitakeover laws as an exogenous shock that reduces shareholder rights as a natural experiment, we find that loan syndicates become significantly more diffuse after the passage of these laws. These results are confirmed in a large sample of bank loans made during the 1990–2007 period when the loan syndicate market matured. Our results show how corporate governance causally affects financial contracting and creditor control in firms.