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We examine the impact of the U.S. bankruptcy procedure on the valuation of corporate securities and capital structure decisions. We provide closed-form solutions for corporate debt and equity values when defaulting firms can either liquidate their assets or renegotiate outstanding debt under court protection. We show that the possibility to renegotiate the debt contract (i) has an ambiguous impact on leverage choices and (ii) increases credit spreads on corporate debt. The sharing rule of cash flows during bankruptcy has a large impact on optimal leverage. By contrast, credit spreads on corporate debt show little sensitivity to this very parameter.

Two conflicting behavioral models, underreaction and overreaction, have been proposed to explain long-run abnormal returns following a variety of corporate events. We test hypotheses that distinguish between these two models. We find that across four different corporate events, long-run abnormal returns exhibit a pattern that is most consistent with investor underreaction to short-term information available prior to the event and to the information conveyed by the event itself. The pattern in long-run abnormal returns is inconsistent with the overreaction model as well as with a model that postulates investor underreaction to short-term information and overreaction to long-term trends.

This article provides evidence linking corporate governance mechanisms to higher bond ratings and lower bond yields. Governance mechanisms can reduce default risk by mitigating agency costs and monitoring managerial performance and by reducing information asymmetry between the firm and the lenders. We find firms that have greater institutional ownership and stronger outside control of the board enjoy lower bond yields and higher ratings on their new bond issues. However, concentrated institutional ownership has an adverse effect on yields and ratings. These results are robust to a specification that controls for institutional ownership being influenced by bond yields.

The effects of proxy contests on the share prices of the affected firms are examined. Data from 97 election contests occuring between 1968-1987 are analyzed in order to determine long-term pre- and post-effects on share prices. Proxy contests are perceived to be a shareholder technique for management discipline, and are thus expected to result in performance improvements. In contrast to previous research, ex-ante and ex-post negative abnormal returns are obtained. During the five years prior to the contest, the cumulative abnormal return is -34.4% and all operating performance indicators evince a decline. While successful retention of incumbents' positions show no long-term negative effects on prices, dissident victory is associated with significantly negative effects after the contest. Cumulative abnormal returns over the next 24 months decline by more than 20%.