We ask whether a standard structural model (Black and Cox (1976)) is able to explain credit spreads on corporate bonds and, in contrast to much of the literature, we find that the model matches the level of investment grade spreads well. Model spreads for speculative grade debt are too low and...

The dynamics of debt are crucial in structural models of credit risk and this paper provides new empirical evidence on these dynamics. For US industrial firms, we find that the future level of debt is negatively related to current leverage. Furthermore, when a firm experiences a negative shock...