The Merton model has several well-documented shortcomings due to its strong assumptions, such as assuming a firm's debt consists of a single zero-coupon bond, and that asset values follow a lognormal diffusion process with constant volatility. One major downside is that it often underestimates short-term default probabilities and does not accurately predict default events in real-world scenarios. This phenomenon is frequently discussed in literature as the 'credit spread puzzle', where empirical spreads are much higher than those predicted by the Merton model.