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GERTNER, ROBERT; SCHARFSTEIN, DAVID
doi: 10.1111/j.1540-6261.1991.tb04615.xpmid: N/A
ABSTRACT We present a model of a financially distressed firm with outstanding bank debt and public debt. Coordination problems among public debtholders introduce investment inefficiencies in the workout process. In most cases, these inefficiencies are not mitigated by the ability of firms to buy back their public debt with cash and other securities—the only feasible way that firms can restructure their public debt. We show that Chapter 11 reorganization law increases investment, and we characterize the types of corporate financial structures for which this increased investment enhances efficiency.
doi: 10.1111/j.1540-6261.1991.tb04616.xpmid: N/A
ABSTRACT This paper examines the losses realized in bank failures. Losses are measured as the difference between the book value of assets and the recovery value net of the direct expenses associated with the failure. I find the loss on assets is substantial, averaging 30 percent of the failed bank's assets. Direct expenses associated with bank closures average 10 percent of assets. An empirical analysis of the determinants of these losses reveals a significant difference in the value of assets retained by the FDIC and similar assets assumed by acquiring banks.
COMMENT, ROBERT; JARRELL, GREGG A.
doi: 10.1111/j.1540-6261.1991.tb04617.xpmid: N/A
ABSTRACT We compare three forms of common stock repurchases. Dutch‐auction self‐tender offers and open‐market share repurchase programs are weaker signals of stock undervaluation than fixed‐price self‐tender offers. The price increase from buyback announcements is greater when insider wealth is at risk, greater following negative net‐of‐market stock returns, and unrelated to prior market returns. Buyback announcement returns are also increasing in the fraction of shares sought, which is consistent with both signalling and an upward‐sloping supply curve for stock.
ASQUITH, PAUL; MULLINS, DAVID W.
doi: 10.1111/j.1540-6261.1991.tb04618.xpmid: N/A
ABSTRACT This paper examines why, in contrast to the predictions of finance theory, firms do not call convertible debt when the conversion price exceeds the call price. The empirical results suggest that the principal reason is because some firms enjoy an advantage of paying less in after‐tax interest than they would pay in dividends were the bond converted. This cash flow incentive is the inverse of an investor's incentive to convert voluntarily if the converted dividends are greater than the bond's coupon. Because of taxation, however, the decisions by investors and firms are not symmetric, and there exist bonds which the firm may not call and an investor will not convert. The results also find that voluntary conversion is significantly related to both the conversion price and the differential between the coupon and the dividends on the converted stock.
CAMPBELL, CYNTHIA J.; EDERINGTON, LOUIS H.; VANKUDRE, PRASHANT
doi: 10.1111/j.1540-6261.1991.tb04619.xpmid: N/A
ABSTRACT The information content of conversion‐forcing bond calls depends on the after‐tax cash flow to bondholders. If the dividend after conversion exceeds the after‐tax coupon but is less than the before‐tax coupon, the call reveals unanticipated decreases in dividends and/or earnings that reduce the tax shield from interest payments. In contrast, a call when the dividend is less than the after‐tax coupon reveals the timing of an anticipated shift from exceptional firm‐specific positive growth to the industry norm. Efforts to document properties of convertible calls are subject to sample‐selection bias because calls are disproportionately associated with positive pre‐call firm‐specific growth.
DIAMOND, DOUGLAS W.; VERRECCHIA, ROBERT E.
doi: 10.1111/j.1540-6261.1991.tb04620.xpmid: N/A
ABSTRACT This paper shows that revealing public information to reduce information asymmetry can reduce a firm's cost of capital by attracting increased demand from large investors due to increased liquidity of its securities. Large firms will disclose more information since they benefit most. Disclosure also reduces the risk bearing capacity available through market makers. If initial information asymmetry is large, reducing it will increase the current price of the security. However, the maximum current price occurs with some asymmetry of information: further reduction of information asymmetry accentuates the undesirable effects of exit from market making.
doi: 10.1111/j.1540-6261.1991.tb04621.xpmid: N/A
ABSTRACT The informational role of strategic insider trading around corporate dividend announcements is studied based on the efficient equilibrium in a signalling model with endogenous insider trading. Insider trading immediately prior to the announcement of dividend initiations has significant explanatory power. For firms with insider selling prior to the dividend initiation announcement, the excess returns are negative and significantly lower than for the remaining firms (with no insider trading or just insider buying) as implied by our model. Another implication is that dividend increases may elicit a positive or negative stock price response depending on the firm's investment opportunities.
doi: 10.1111/j.1540-6261.1991.tb04622.xpmid: N/A
ABSTRACT A capital structure theory based on corporate control considerations is presented. The optimal debt level balances a decrease in the probability of acquisition against a higher share of the synergy for the target's shareholders. This leads to the following implications: (i) the probability of firms becoming acquisition targets decreases with their leverage, (ii) acquirers' share of the total equity gain increases with targets' leverage, (iii) when acquisitions are initiated, targets' stock price, targets' debt value, and acquirers' firm value increase, and (iv) during the acquisition, target firms' stock price changes further; the expected change is zero and the variance decreases with targets' debt level.
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