We construct firm-specific measures of expected equity returns using corporate bond yields, and replace standard ex post average returns with our expected-return measures in asset pricing tests. We find that the market beta is significantly priced in the cross section of expected returns. The...

Structural models of default calibrated to historical default rates, recovery rates, and Sharpe ratios typically generate Baa--Aaa credit spreads that are significantly below historical values. However, this "credit spread puzzle" can be resolved if one accounts for the fact that default rates...

A central issue in finance is whether stock prices move because of revisions in expected cash flows or discount rates, and by how much of each. Using direct cash flow forecasts, we show that stock returns have a significant cash flow news component whose importance increases with the investment...

A crucial issue in asset pricing is to understand the relative importance of discount rate (DR) news and cash flow (CF) news in driving the time-series and cross-sectional variations of stock returns. Many studies directly estimate the DR news but back out the CF news as the residual. We argue...

Pledgeable assets support more borrowing, which allows for further investment in pledgeable assets. We use this credit multiplier to identify the impact of financing frictions on corporate investment. The multiplier suggests that investment-cash flow sensitivities should be increasing in the...

This article uses a unique dataset to study how firms managed liquidity during the 2008--2011 financial crisis. Our analysis provides new insights on interactions between internal liquidity, external funds, and real corporate decisions, such as investment and employment. We first describe how...

We use Monte Carlo simulations and real data to assess the performance of methods dealing with measurement error in investment equations. Our experiments show that fixed effects, error heteroscedasticity, and data skewness severely affect the performance and reliability of methods found in the...