This paper provides new evidence on the failure of the Q-theory of investment. The Q-theory implies the state-by-state equivalence of stock and investment returns---an important implication of many asset pricing models. Using aggregate data, I find there exists a realistic parameterization of...

When a corporation issues debt with a fixed nominal coupon, the real value of future payments decreases with the price level. Forward-looking corporate default decisions therefore depend on monetary policy through its impact on expected inflation. We build a general equilibrium economy with...

We embed a structural model of credit risk inside a dynamic continuous-time consumption-based asset pricing model, which allows us to price equity and corporate debt in a unified framework. Our key economic assumptions are that the first and second moments of earnings and consumption growth...

type="main" <title type="main">ABSTRACT</title> <p>A standard assumption of structural models of default is that firms' assets evolve exogenously. In this paper, we examine the importance of accounting for investment options in models of credit risk. In the presence of financing and investment frictions, firm-level variables...</p>