Structural models of corporate bond pricing with personal taxes

Performance and determinants of the Merton structural model: Evidence from hedging coefficients

“…Our findings are robust to different periods analyzed and different definitions of leverage and estimations of volatility. Possible explanations of the Merton (1974) model failures could be related to the difficulties in estimating the underlying variables, such as volatility, corporate value or market value of debt (see Huang and Huang, 2003), liquidity and tax asymmetries (Chen et al, 2007b;Longstaff et al, 2005;Helwege et al, 2013;Qi et al, 2010) and to model assumptions regarding default and loss given default (Black and Cox, 1976;Leland, 1994;Leland and Toft, 1996).…”

Labor unions, bargaining power and corporate bond yield spreads: Structural credit model perspectives

“…Since corporate bond investors must pay both state and local tax on coupon income, bonds with a higher coupon rate will be charged more tax than those with a lower coupon rate. Hence, bonds with a higher coupon will be less attractive to investors, and may require a higher premium (Qi et al, 2010). However, empirical results of previous studies indicate that coupon rate may have other effects on bond yield spreads, such as liquidity, and/or upward-sloping spot rate term structure.…”

“…For example, Liu et al (2006) identifies a sizable tax effect on bond yield spreads by extending the Leland and Toft (1996) model. Using both rating-based calibration and maximum likelihood estimation, Qi et al (2010) show that the spread prediction ability of structural credit models improves considerably when personal tax is taken into account in most major structural credit models.…”

Corporate Bonds and Product Market Competition

“…First, it contributes to the vast literature examining the factors that affect bond credit spreads. Recent studies explore the effect of bond and firm characteristics on bond credit spreads, such as leverage (Collin-Dufresne, Goldstein, and Martin 2001), taxes (Elton et al 2001;Qi, Liu, and Wu 2010), equity volatility (Campbell and Taksler 2003), liquidity (Chen, Lesmond, and Wei 2007;Dick-Nielsen, Feldhütter, and Lando 2012), and supplier's information flow (Chen et al 2013). My article provides the first direct link between product market competition and bond yield spreads.…”