Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) imposed stringent requirements on Key Employee Retention Plan (KERP) adoptions and implicitly favored Performance Incentive Plans (PIPs) in the amended Chapter 11. We use court documents to differentiate between retention versus performance incentive plans, and examine their impact on bankruptcy resolution before and after...

We study how equity and debt contracts commit investors to discipline managers. Our model shows that the optimal allocation of debt, equity, and control rights depends on which disciplinary action is more efficient. When the efficient action is managerial replacement, then control rights should be allocated to equity holders, and capital structure should consist of equity and long-term debt. Wh...

We study a novel aspect of a firm’s capital structure, namely the profile of its debt maturity dates. In a simple theoretical framework we show that the dispersion of debt maturities constitutes an important dimension of capital structure choice, driven by firm characteristics and debt rollover risk. Guided by these results we establish two main empirical results. First, using an exogenous shoc...

Multivariate Discriminant Analysis (MDA) has long been used to classify failing and non-failing firms with high accuracy rates, although a number of methodological flaws are well known. The alternative approach based on Conditional Probability Analysis (CPA) models have been applied to forecast mergers and acquisitions and extended to the prediction of corporate failure. This is used her to dis...

This paper studies how default varies with aggregate income. We analyze a model in which optimal contracts enable risk sharing of privately observed, idiosyncratic income by allowing for default. Default provisions allow agents with low idiosyncratic income realizations to repay less and thus provide insurance. Default penalties ensure that only these agents default. We show that default can oc...

Since observed audit opinions do not generally become more favourable after companies switch auditors, it has been argued that companies do not successfully engage in opinion-shopping. Rather than comparing observed preand post-switch audit reports, this study tests for opinion-shopping by predicting the opinions companies would have received had they made opposite switch decisions. My results ...

A standard assumption of structural models of default is that firms assets evolve exogenously. In this paper, we document the importance of accounting for investment options in models of credit risk. In the presence of financing and investment frictions, firm-level variables which proxy for asset composition carry explanatory power for credit spreads beyond leverage. As a result, cross-sectiona...