24 research outputs found
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Vulture Funds and the Fresh Start Accounting Value of Firms Emerging from Bankruptcy
We study how distress-oriented hedge funds (vulture funds) play an important role in the fresh start valuation of firms emerging from Chapter 11 reorganization. We find that loanto-own vultures acquire debt positions of the distressed firm that grant dominant power in the bankruptcy negotiations, and they then use the discretion allowed by fresh start accounting to introduce valuation bias in their favor. We show that the strategic influence over fresh start values can create opportunities to increase vulture investors’ returns at the expense of other claim holders
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Do analysts understand accruals’ persistence? Evidence revisited
We revisit the question of whether analysts anticipate accruals’ predicted reversals (or persistence) of future earnings. Prior evidence shows that analysts are over optimistic with respect to working capital (WC) accruals which is interpreted as their inability to understand accruals’ persistence. Using total accruals (TACC) that in addition to WC accruals cover non-current operating and financing accruals, we show that analysts’ forecast errors are uncorrelated with accruals. We show that analysts’ optimism with respect to accruals is due to the use of an incomplete accrual measure, which does not necessarily indicate analysts’ lack of sophistication. Our results imply that traditional accrual definition should be revised in future studies. The main implication of our finding is that analysts seem to exhibit the necessary sophistication in understanding accruals persistence contrary to suggestions in prior research. Our findings are in line with the idea that any anomalous stock price behaviour related to accruals is not due to analysts’ forecasts, i.e., analysts' earnings forecasts and recommendations should not be considered as the originating source of stock price underreaction or overreaction with respect to accruals
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Firm Incentives, Institutional Complexity and the Quality of "Harmonized" Accounting Numbers
In this paper, we investigate how firm reporting incentives and institutional factors affect accounting quality in firms from 26 countries. We exploit a unique multicountry setting where firms are required to comply with the same set of international reporting standards. We develop an approach of cross-country comparisons allowing for differences between firms within a country and we investigate the relative importance of country- versus firm-specific factors in explaining accounting quality. We find that financial reporting quality increases in the presence of strong monitoring mechanisms by means of ownership concentration, analyst scrutiny, effective auditing, external financing needs, and leverage. Instability of business operations, existence of losses, and lack of transparent disclosure negatively affect the quality of accounting information. At the country level, we observe better accounting quality for firms from regulatory environments with stronger institutions, higher levels of economic development, greater business sophistication, and more globalized markets. More importantly, we find that firm-specific incentives play a greater role in explaining accounting quality than countrywide factors. This evidence suggests that institutional factors shape the firm's specific incentives that influence reporting quality. Our findings support the view that the global adoption of a single set of accounting standards in isolation is not likely to lead to more comparable and transparent financial statements unless the institutional conditions and the firm-specific reporting incentives also change
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The Rise of Covenant-Lite Bond Contracting
We investigate the trading and yield effects of covenant-lite (cov-lite) high-yield bond contracts, which have a restricted (lite) set of covenants. The excluded covenants often are those that use accounting performance measures. Although much research has focused on the potential benefits of accounting as a basis for debt contracting, little is known about settings where it may be optimal to exclude accounting performance statistics from public debt contracts. We find that cov-lite high-yield bonds have a higher trading turnover and lower yield spreads. Our findings provide empirical support for theory which predicts, for optimal bond covenant design, that a trade-off between improving trading ease versus enhanced investor protection needs to be managed. These results enhance our understanding of the limits of accounting’s role in (bond) contracting design