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Abstract:
We examine how financial institutions assess the credit risk associated with off-balance sheet operating leases. In particular, we test the differential explanatory power of as-reported financial results versus financial results adjusted for the capitalization of operating leases for a sample of 2,535 bank loans. Our results suggest that, on average, banks consider off-balance sheet obligations when setting loan spreads. However, adjusted financial ratios are only relevant for banks' assessments in the absence of a credit rating. Adjusting for operating leases appears more important for non-secured loans relative to secured loans. We also find some evidence that banks assess the underlying economics of the lease, and set loan spreads accordingly; whereas Standard and Poor's (S&P) appears to always capitalize operating leases without regard for differential lease characteristics, which we confirm in supplemental analysis.

off balance sheet, leases, credit risk, credit ratings, banks

Abstract:
This paper provides the first large sample empirical evidence on the extent to which restructuring charges are associated with earnings management. Further, the study examines whether this association changed following FASB action to curtail suspected restructuring related earnings management. We examine 247 restructuring charges recorded between 1989 and 1992, a time period when restructurings were increasing in frequency and virtually unregulated with respect to accounting guidance. We also analyze a sample of 112 firms that recorded restructurings in 1995 and 1996, a period following the FASB action to standardize accounting for restructurings.

We use several empirical specifications to control for the portion of the restructuring charge attributable to fundamental economic performance and macro-economic factors. We then estimate a series of multivariate regressions to determine if the restructuring charge is associated with earnings management proxies, a time dummy for reporting regime change, and interactions between the two. We document a significant decrease in the magnitude of the average charge after the FASB action. In the pre-regulation period, we document associations between the excess component of the restructuring accrual and firm size, leverage and CEO changes; however these relations do not exist in the post-regulatory period. These results suggest that FASB action had a significant effect on curtailing earnings management via restructurings.

earnings management, restructuring charges, special items, discretionary accruals

Abstract:
We study the determinants and market impact of sell-side debt research. Analyzing a sample of 5,920 debt reports published by fifteen brokerage firms from 1999 to 2004, we document that companies with a higher probability of financial distress, lower market-to-book ratio, larger debt, and higher leverage receive more debt research. In addition, we document higher frequency of debt reports around credit ratings downgrades and find that their publication impacts equity prices. The evidence enhances our understanding of the nature of the market forces shaping sell-side debt research and its effect on price formation.

Debt, Information Intermediaries, Distress, Analyst

Abstract:
We examine the change in earnings announcement market reactions for a sample of 130 public companies that receive Securities and Exchange Commission (SEC) comment letters. We hypothesize that a firm's disclosure environment is enhanced by the resolution of the SEC enquiry, resulting in dampened market reactions at the time of ensuing earnings announcements. Our evidence of reduced return volatility and trading volume supports our hypothesis. We find no change in the quantity of the firms' voluntary disclosure. Combined, the results suggest that through their review of registrant filings, the SEC affects the information environment of firms in the United States.

Abstract:
We hypothesize that sell-side debt analysts enhance the efficiency of capital markets in two ways: they produce information and speed up the debt market’s process of incorporating publicly available information. We empirically examine whether debt and equity markets jointly react to debt research reports while controlling for alternative information sources, and whether the debt market lags the equity market less when debt research exists. The evidence supports both hypotheses. Our study adds to a wide body of research investigating the diverse institutional arrangements under which information is produced and disseminated, and its impact on capital markets equilibrium and efficiency.

Financial analysts, Information, Equity markets, Debt markets, Market Efficiency

Abstract:
An analyst who owns stock in the company she covers may be tempted to protect or enhance her personal interests. I examine how this conflict of interest affects the reporting of sell-side analysts. I identify and collect two samples, the first from SEC Form 144 filings, and the second from voluntary ownership disclosures. Ordered probit analyses show that owning-analyst recommendations are slightly more cautious than those of the control analysts but returns tests suggest the market generally does not react differentially to the two groups. I find little robust evidence that stock ownership leads to optimistic analyst reporting, however I do find that analysts who are consistently optimistic are owners.

Analyst, Incentives, Form 144, Stock ownership, Capital Markets

Abstract:
Some firms define their fiscal year in terms of weeks rather than as a full 12-month period. A normal fiscal year for these firms consists of 52 weeks, and every fiscal quarter comprises 13 weeks, which leaves out one day (two days) in a normal (leap) year. These additional days result in one extra week being added on to every fifth (or sixth) fiscal year and consequently one fiscal quarter in that year comprises 14 weeks. We examine the effect of the additional week on reported earnings and revenues and also study whether investors and analysts anticipate and appropriately adjust for the extra week included in a 14-week quarter. As expected, earnings and revenues are higher on average in 14-week quarters than suggested by time-series models. We find that analysts underestimate both earnings and revenues in 14-week quarters, consistent with analysts either not being aware of, or not fully adjusting for the impact of the additional week. Investors also seem to not anticipate, and react positively to the good news resulting from an additional week of operations; buying and holding stocks in their 14-week quarters results in positive abnormal returns of approximately 2.9% over the quarter. Collectively, this evidence is consistent with investors and analysts relying on naive earnings and revenue expectations models. Given the ease with which one can adjust earnings and revenue expectations for the extra week, we attribute analysts' and investors' apparent failure to do so to a lack of effort rather than ability.

Market Efficiency, Analyst

Abstract:

Subject Areas: Global financing strategies; Pricing new bond issues; Political risk.
Case Setting: June 1997, Hong Kong.


Situation:
In June 1997, Hutchison Whampoa Finance Ltd. was preparing the offering circular for a US$1 billion bond offering. Until now, the company had drawn on short- and medium-term loan facilities underwritten by banking syndicates for external financing. But with Hutchison Whampoa's diverse and expanding operations, the needs of the group were beginning to extend beyond the local banking community. The need for long-term financing was also prompted by the recent reorganization of the Cheung Kong (Holdings) group which resulted in Hutchison Whampoa acquiring an 84.58 per cent interest in Cheung Kong Infrastructure. Moreover, the time was ripe to increase the ratio of fixed-rate funding at prevailing yields which were currently attractive. But Group Managing Director, Canning Fok, and Group Finance Director, Bill Shurniak, both wondered what the reception would really be for a Hong Kong-based bond issue at the time of the Handover to China.

The primary objective of the case is to expose students to the importance of international financial markets for long-term corporate financing. The students learn about the institutional aspects of the global debt issuance process, in general, and the U.S. Yankee bond market, in particular. Another objective of the case is to evaluate factors that may affect the pricing of bond offerings, such as maturity, credit rating and after-market liquidity in the international context. A final objective is to highlight how political factors can influence the outcomes of securities offerings in foreign countries.