In-Substance Defeasance And Shareholders Wealth

In November, 1983, the Financial Accounting Standards Board issued Statement No. 76: Extinguishment of Debt. The Statement permitted corporations completing an in-substance defeasance to recognize an increase in earnings and earnings per share. High interest rates in 1984 and the Statement encouraged corporate managers to in-substance defeasance debt and show the associated increase in earnings per share. In our examination of 19 companies defeasing bonds during the period 1983-1985, we found no impact on stock price. Although the process led to an accounting profit for each company, investors interpreted the change in capital structure to be transitory and/or too small to require altering their investment portfolios

Acquisitions And Common Stock Returns In The Health Care Industry: 1982-1985

Employing a methodology commonly used to determine the movement of stock returns around a specific event, we examined the movement of common stock returns of acquiring firms in the health care industry for three periods, 1982-1983, 1984, and 1985.  We find that in the 1982-1983 period, investors could expect negative excess returns from holding tock in acquiring firms in the health care industry.  In contrast, for the 1984 and 1985 periods we find no evidence of excel returns for investors.  The difference between the two periods, we believe, is due to the more competitive environment which existed in the industry in the latter two periods