An Empirical Investigation of Stock Dividends-in-Kind

We investigate share price reactions to announcements of dividends payable in the common stock of corporations different from the issuing firm. We find that firms that declare these dividends (typically investment companies) experience positive abnormal returns upon announcement. We also find that such dividends are more likely to be declared when the shares to be distributed have peaked in value. Consistent with this finding, we document negative announcement-period abnormal returns for firms having their shares distributed. Additional tests reveal that prices respond more negatively when the information signal is strongest, when outside ownership is more dispersed, and when management is more entrenched

The Information Content of Withdrawn Audit Qualifications: New Evidence on the Value of Subject-To Opinions

Statement on Auditing Standards No. 58 (AICPA 1988) effectively eliminated the subject-to audit opinion which auditors used to highlight financial statement uncertainties. Elimination of the subject-to report implied the Auditing Standards Board\u27s belief that the opinion conveyed no material information to users. Several market-based studies of the value of subject-to opinions have yielded mixed results. A major limitation in most of these studies was a lack of precision in identifying the exact date upon which information, if any, was revealed to the market. This study extends the previous work by examining the common share price reactions to public announcements of withdrawn subject-to opinions. The sample consists of 52 withdrawn opinions announced betweeen 1978 and 1987. Each announcement had to be free of potentially contaminating information that might have affected common stock prices. Also, adequate common stock price data had to be readily available for all firms. To measure the impact of the announcement, a method was employed by which expected returns (calculated for a period prior to the time closely surrounding the announcement) were compared to the returns during the announcement period. Results indicate an increase in returns attributable to the announcement

The Importance of Call Delays and Cash Flow Positions in Evaluating the Information Content of Convertible Preferred Stock Calls

We examine a sample of in-the-money convertible preferred stock calls and find that they are delayed. We find that the length of the call delay does not depend on the relation between the preferred stock dividends and the pro rata common dividends to be paid on conversion. Thus, our evidence suggests that preferred stock calls may be used for signaling purposes. In support of this, we find that only delayed calls (i.e., those with potential signaling elements) are viewed negatively by equity investors. We also show that, in responding to delayed call announcements, investors appear to react to two distinct information elements. First, price responses to delayed calls are increasingly negative the larger the cash flow disadvantage to calling. In other words, common investors respond more negatively to calls when the forced conversion results in convertible holders receiving larger dividends than were previously required. Second, both cash flow advantage and cash flow disadvantage firms experience significant downward shifts in earnings growth during post-call periods, suggesting that delayed calls are timely signals of decreasing profitability

The Impact on IPO Assurance Fees of Commercial Bank Entry into the Equity Underwriting Market

Changes in the provisions of the United States Banking Act of 1933 have allowed the entry of commercial banks into the initial public offering (IPO) underwriting market. In this paper, we examine the effect of commercial bank equity underwriting on the fees paid to auditors. We predict that IPO assurance fees will be higher for equity offerings underwritten by commercial banks than for offerings handled by traditional underwriters because (1) commercial banks are relatively inexperienced in bringing firms public, requiring additional assistance from accounting firms in the IPO process; (2) new entrants into the underwriting market may manage lower quality issues that require additional assurance services; and/or (3) since commercial banks have greater resources than do traditional investment banks, they are likely to be exposed to greater litigation risk, providing incentives for commercial bank underwriters to ensure that the IPO firm purchases greater assurance from the auditor. However, we expect fees to decrease if a previous lending relationship existed between the commercial bank and its client. Our findings, based on a sample of issues brought to market between 1991 and 1997, support these expectations

Refinancing Pressure and Earnings Management: Evidence from Changes in Short-term Debt and Discretionary Accruals

Refinancing pressure may entice a very specific form of managerial misbehavior on the part of borrowers. Borrowers utilizing a greater amount of short term debt in one period may feel pressure to make their firms look as attractive as possible leading into the next period when refinancing may take place. In other words, potential refinancing pressure may lead managers to manipulate earnings. We examine the relation between changes in debt in current liabilities (short-term debt) and discretionary accruals as an indicator of the propensity to manage earnings. Our results show that (i) firms have higher discretionary accruals during periods of increased short-term debt, (ii) firms have higher discretionary accruals prior to the initiation of bank loan agreements, and (iii) both of these relations are influenced by a firm’s credit risk

An Investigation of the Pricing of Audit Services for Financial Institutions

In this paper we investigate audit pricing for financial institutions. We modify the standard audit fee model for industrial companies by incorporating measures of risk and complexity that are either unique to or more relevant for banks, and that are used by bank regulatory agencies. For a sample of 277 financial institutions in fiscal 2000, we find that audit fees are higher for banks having more transactions accounts, fewer securities as a percentage of total assets, lower levels of efficiency, and higher degrees of credit risk. Higher fees also obtain for savings institutions, for banks that are more involved in acquisition activity, and for institutions that are required by regulatory agencies to maintain higher levels of risk-adjusted capital. Our model reveals that the complexities and risks deemed most important by regulatory agencies are also those that tend to be priced by audit firms. The importance of the audit process for banks is likely to intensify in the future as regulatory changes increase the importance of market discipline in controlling bank risk-taking

The Interaction Among Multiple Governance Mechanisms at Young, Newly Public Firms

We focus on the relations among inside ownership, board composition, unaffiliated block ownership, and compensation structure for a sample of firms following their IPOs. Specifically, we follow firms for up to eleven years after their IPOs and examine the full sample and subsamples of firms that survive, are acquired, or that file for bankruptcy during the sample period. We find that as CEO ownership declines, board independence, board seats held by venture capitalists, and unaffiliated block ownership increase. Our findings suggest that as inside ownership decreases alternative governance mechanisms evolve to help mitigate the resulting increase in agency costs. Interestingly, the associations between CEO ownership, the fraction of venture capital board membership, and unaffiliated block ownership exist only for firms that survive over the eleven-year sample period

The Valuation Effects of Private Placements of Convertible Debt.

Share price reactions to announcements of sixty-one private placements of convertible debt securities are investigated and a significant positive average abnormal return of 1.80 percent is documented. This unique result contrasts with the negative average abnormal return associated with public sales of convertible debt securities. The positive effect on common shareholders' wealth appears to be related to the relative size of the private issue and unrelated to the degree to which the convertible bond is "out-of-the-money" at issuance. Copyright 1991 by American Finance Association.