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Abstract:
This paper examines the relationship between convertible debt issue announcements, announcement period share price reactions, and the profitability of the issuing firm's growth opportunities. We find that investor reactions are positively related to the profitability of the issuing firm's investment opportunities. However, the relationship does not appear to be particularly robust across several model specifications. We then investigate the explanatory power of the issuer's relative performance within its own industry, and find that industry- adjusted growth opportunities appear to better explain investor reactions to convertible debt issues. Share price reactions are less negative (more positive) the higher the issuer's investment opportunities relative to that of the median industry performer. Thus, investors seem to react to convertible debt offerings more on the basis of relative performance with the issuer's industry, rather than absolute measures of issuer or industry performance.

Abstract:
Proponents of compensation plans based on economic profits argue that these plans control for deficiencies in stock-based or earnings-based bonus plans and thereby better align managers? and shareholders? interests. We examine whether compensation plans based on economic profits do in fact produce better investment decisions. We use a sample of 51 firms adopting economic profit plans between 1986 and 1994 to examine compensation, ownership, and governance structures, and long-run operating and stock price performance. While we document significant improvements in operating performance subsequent to adoption of the compensation plans, a sample of nonadopting matched firms shows similar significant improvements. There is no significant difference in the stock price performance of the two groups in the four-year period following an adoption. We conclude that economic profit plans are no better than traditional plans that provide a blend of earnings-based bonuses and stock-based compensation in terms of their ability to create shareholder wealth.

Abstract:
After the first day of public trading, the long run return performance of initial public offerings ('IPOs') is poor relative to a sample of matching firms. We provide evidence from a large sample of IPOs during 1988-1995 in support of the theory that failure rates are inefficiently priced during the going public process. During the sample period, all of the poor long run performance of IPO firms is accounted for by a relatively small number of issuers subsequently delisted for reasons related to poor operating performance ('busted' IPOs). Investment banks establish offer prices at a level that fails to compensate investors for the likelihood and costs of financial distress. Investors are insufficiently pessimistic about the business prospects of some IPOs, and apparently purchase shares assuming all new issues will survive.

Abstract:
This paper documents significantly negative stock price reactions to shareholder initiated class action lawsuits. We find that shareholders partially anticipate these lawsuits based on lawsuit filings against other firms in the same industry and capitalize part of these losses prior to a lawsuit filing date. We show that the more likely a firm is to be sued, the larger is the partial anticipation effect (shareholder losses capitalized prior to a lawsuit filing date) and smaller is the filing date effect (shareholder losses measured on the lawsuit filing date). Our evidence suggests that previous research that typically focuses on the filing date effect understates the magnitude of shareholder losses, and such an understatement is greater for firms with a higher likelihood of being sued.

Class Action Lawsuits, Industry Spillovers, Litigation, Partial Anticipation, Propensity to be Sued, Shareholder Wealth Effects

Abstract:
This paper identifies the determinants of market-wide and industry-specific security issue cycles using an autoregressive conditional duration model. We examine the business conditions, investor sentiment, and time-varying asymmetric information hypotheses and show that issue activity in different industries is consistent with different explanations. We find that the business conditions and sentiment hypotheses explain issue activity by manufacturing firms; while issue activity by financial institutions is partly explained by the sentiment hypothesis. On the other hand, none of these explanations are capable of explaining issue activity in the business services industry. Surprisingly, when all of these industries are pooled to examine market-wide activity, we find that none of these hypotheses are significantly related to issue activity. One explanation is that market-wide aggregation washes out much of the industry-specific information because issue activity is not perfectly correlated across industries. Using this observation, we then consider whether technological innovations are important determinants of industry-specific issue activity. We test for industry contagion by examining the periods before and after the Netscape initial public offering. We find evidence of an increase in the correlation of issue activity in related industries, which is consistent with the technological innovations hypothesis.

Issue Cycles, Initial Public Offerings, IPO,autoregressive conditional duration, ACD, contagion

Abstract:
This paper studies convertible security design for a sample of 814 issuers over the years 2000 through 2007. We examine the determinants of the choice of fixed income claim and the method of payment using a nested logit regression model. We find that firms select security designs that reduce corporate income taxes, minimize refinancing costs, and help mitigate managerial discretion costs. Convertible debt issuers frequently select payment methods that permit them to report higher diluted earnings per share. Some of these firms also adopt simultaneous financial strategies (share repurchase programs and call spread overlays) that inflate reported earnings. Firms that adopt these earnings management strategies are more likely to choose certain investment banks.

Convertible security financing, Security design, Net share settlement

Abstract:
This paper studies convertible security design for a sample of 819 issuers over the years 2000 through 2007. We examine the determinants of the choice of fixed income claim and the method of payment using a nested logit regression model. We find that firms select security designs that reduce corporate income taxes, minimize refinancing costs, and help mitigate managerial discretion costs. Convertible debt issuers frequently select payment methods that permit them to report higher diluted earnings per share. Some of these firms also adopt simultaneous financial strategies (share repurchase programs and call spread overlays) that inflate reported earnings. Firms that adopt these earnings management strategies are more likely to choose certain investment banks.

Convertible security financing; Convertible debt; Convertible preferred stock; External finance; Security choice decision; Security design; Cash settlement; Net share settlement; Mandatory conversion.

Abstract:
This paper uses an Adjusted Present Value model based on the interaction between taxes and expected bankruptcy costs to estimate firm-specific estimates of the ex ante bankruptcy discount. I find that firms lose 16.3% of firm value in bankruptcy which represents an ex ante bankruptcy discount of 1.4%. By contrast, the present value of tax shields from debt financing are 3.6% of firm value.

Bankruptcy, Financial Distress, Bankruptcy Costs

Abstract:
This paper seeks to provide an explanation for why corporate officers manage the disclosure of accounting information. We show that earnings management affects firm value when value- maximizing managers and investors are asymmetrically informed. In equilibrium, the strategic management of reported earnings influences investors' assessments of the market values of companies' shares.

Abstract:
This paper investigates how firms that made initial public offerings of equity between 1975 and 1984 report earnings. For a sample of 489 firms, we find a positive association between a proxy for income smoothing and firm performance. Firms that perform well tend to report earnings with less variability relative to cash from operations; while firms that perform poorly tend to report earnings that increase earnings variability relative to cash from operations. In addition, the five-year earnings response coefficient is greater for firms that are able to smooth earnings relative to cash flows. This result is consistent with a hypothesis that the market makes better assessments of the information content of earnings for firms with smoother earnings. Finally, we show that IPO firms tend to use discretionary accruals to smooth income relative to prior year's earnings.

Abstract:
We study announcements of convertible debt issues by a large sample of 503 NYSE/AMEX and 303 NASDAQ firms. Pre-issue share price performance is abnormally good for both sets of firms. Announcement period returns are significantly negative for both sets of firms, and post-issue performance also is poor for both. We document a common set of factorsthat governs the design of convertible debt. These factors are consistent with a bondholder-stockholder agency conflict explanation for the design of convertible debt. We also examine and test a number of alternative theories that attempt to explain share price reactions to announcements of convertible debt offers. The factors that partially explain security price reactions differ across NYSE/AMEX and NASDAQ firms. Although no one theory appears to fully explain share price reactions, information asymmetries do influence the share price reactions of both sets of firms. However, we find that the source of the information asymmetry differs between NYSE/AMEX and NASDAQ firms. The well-known size effect does not account for the different reactions across exchanges.

Abstract:
This paper proposes and implements a security design framework to assess why corporate managers issue convertible debt. We examine three theories that make predictions about the design of convertible debt. Our results suggest that some issuers design convertible debt to mitigate asset substitution problems, while others design it to reduce adverse selection problems. We also find that issuers vary convertible debt security design over the business cycle in response to time-variation in asset substitution and adverse selection problems. Overall, the results indicate that corporate managers actively alter convertible debt security design to mitigate costly external finance problems.

Abstract:
This paper examines post-issue operating performance, risk characteristics, and analyst forecasts to more fully understand issuer motivations for, and investor reactions to, the issuance of convertible debt. The main finding is that announcements of convertible debt offerings convey information about a firm's future operating performance and future risk changes. Issuer systematic risk declines, while unsystematic risk increases significantly in the post-offer period. Short-term and long-term measures of operating performance deteriorate. The former effect is caused by industry conditions, while the latter is issuer-specific. Finally, we find that analysts consistently overestimate issuer near-term earnings and long-term earnings growth rates. The results provide support for risk-shifting and adverse selection motives for the use of convertible debt.

Abstract:
We suggest and present evidence that managers use discretionary accruals to smooth income around the managers' assessment of the firms' permanent earnings. We suggest that income smoothing is a long-term strategy which accomplishes multiple purposes. We form predictions regarding the direction of discretionary accruals in a given year by comparing income before discretionary accruals to the previous year's reported earnings. We further hypothesize and present evidence that earnings response coefficients which measure the extent to which reported earnings reflect the information used by the market in forming prices are higher for firms that engage consistently in income smoothing.

Abstract:
This paper examines the ability of the risk-shifting hypothesis and the backdoor-equity hypothesis to explain firms' decisions to issue convertible debt. Using a security choice model that incorporates pre-offer issue, issuer, and macroeconomic information, we document significant variation in the market reaction to new convertible debt issues depending on whether investors expect the motivation for issuance to be asset substitution or asymmetric information. Our results suggest that both motives explain the use and design of convertible debt. Some firms issue convertible debt instead of straight debt to mitigate the costs of bondholder/stockholder agency conflicts. Other issuers issue convertible debt instead of common equity to reduce the costs of adverse selection.

Abstract:
This paper examines the relation between the volatility of the crude oil futures market and changes in initial margin requirements. To closely match changes in futures market volatility with the corresponding changes in margin requirements, we infer the volatility of the futures market from the prices of crude oil futures options contracts. Using a mean-reverting diffusion process for volatility, we show changes in margin policy do not affect subsequent market volatility.