Proportionate consolidation versus the equity method: Additional evidence on the association with bond ratings

From a financial analysis perspective, proportionate consolidation of significant influence equity investments is often presumed to provide more useful information than equity method accounting. Surprisingly, Kothavala [Kothavala, K., 2003, Proportional consolidation versus the equity method: A risk measurement perspective on reporting interests in joint ventures, Journal of Accounting and Public Policy 22, 517-538.] finds that financial statement measures based on the equity method are more relevant for bond ratings than are similar measures based on proportionate consolidation. This study provides additional evidence regarding this issue. Using a sample of manufacturing firms with significant influence equity investments accounted for under U.S. GAAP, the results indicate that pro forma proportionately consolidated financial statements have greater relevance than equity method statements for explaining bond ratings.     

ACCOUNTING FOR INVESTMENTS IN UNINCORPORATED JOINT VENTURES

A consideration of the pertinent legal and commercial features of unincorporated joint ventures reveals some accounting and disclosure issues that are not adequately dealt with by existing accounting standards or disclosure rules. In addition, a review of current practice reveals major deficiencies in reporting the financial results of investments in joint ventures. Some deficiencies, especially the disclosure of contingent liabilities, may be in breach of the requirements of the Companies Act, 1961. Our conclusion on accounting methods is that the equity method is to be preferred to the more popular proportionate consolidation method.     

Proportional consolidation versus the equity method: A risk measurement perspective on reporting interests in joint ventures

Under Canadian generally accepted accounting principles (GAAP), firms are required to proportionally consolidate joint venture investments, as opposed to the United States where the equity method is used. Using a sample of Canadian firms, this study investigates the relative information content of equity method and proportionally consolidated financial statement amounts for explaining market risk. This is possible for Canadian firms where detailed footnote disclosures permit the calculation of pro forma equity method amounts. The findings are surprising in that whereas proportionally consolidated financial statements are more risk relevant than equity method statements for explaining price volatility, equity method statements are more risk relevant than proportionally consolidated ones for explaining bond ratings. The findings suggest that different market participants use financial statement information differently. The study also finds that failure to disclose disaggregated joint venture accounting amounts, as is the case under US GAAP, masks information that could help market participants assess risk.     

The impact of junior debt issuance on senior unsecured debt’s risk premiums

Numerous studies have examined the impact of security issuance upon the value of pre-existing debt and equity but the focus has largely been on changes in equity value. We examine changes in senior unsecured debt risk premiums that accompany new junior debt issues. Additionally, we test several hypotheses regarding the potential impacts of junior debt issues. Extant theory suggests senior debt value may be threatened under certain conditions by the issuance of junior debt. Our results indicate that when junior debt replaces bank debt, senior default risk premiums experience abnormal declines. The result is broadly consistent with the elevation of the senior unsecured debt by way of the elimination of a separate and more senior class of debt claimants. In contrast, we also find that larger junior bond issues are associated with abnormal increases in senior risk premiums, broadly consistent with issue size being correlated with negative information about firm cash flows. We find strong evidence of interaction effects. For example, replacement of bank debt results in greater changes in default risk premiums the larger the issue size. We also find lower credit ratings magnify other effects. For example, if the junior debt issued matures before the outstanding senior unsecured bond, senior risk premiums experience abnormal increases for lower rated debt.     

西方险企投资在金融危机中的整体表现及原因探析

保险资金投资组合整体上受本轮危机冲击不大,其中美国寿险公司通用账户的整体表现最好。其原因有:险资对次贷关联资产风险暴露十分有限且各类安全性指标出淤泥而不染;对受牵连的高风险资产,险资配置股权比例也低且私募股权账面值不受股指下跌拖累;债券方面,风险溢价上升与基准利率下调产生抵消作用,国企债在很多险资企业债中占上风。主要启示包括:险资资产配置要与波动性承受能力相适应,尤其主力资产要坚守传统安全资产、系统重要性资产。     

Evidence on Value Creation in the Financial Services Industries through the Use of Joint Ventures and Strategic Alliances

While an extensive body of literature has examined merger, acquisition, and consolidation activity in commercial banks and other financial services firms, little attention has been paid to examining how these institutions use the cooperative activities of joint ventures and strategic alliances to accomplish their growth objectives. We analyze the effects of the use of joint ventures and strategic alliances by a sample of firms in the banking, investment services, and insurance industries. Our results show that commercial banks, investment services firms, and insurance companies experience significant abnormal returns of 0.66% on average when they announce their participation in a joint venture or strategic alliance. These abnormal returns are significantly positive across the four strategic motives of domestic, international, horizontal, and diversifying cooperative activities. Using a matched sample, we also show that our sample firms enjoy significant, positive, abnormal returns for holding periods of six, 12, and 18 months after the announcement of the cooperative activity.     

上市公司违约风险、盈余质量与银行信用借款——基于沪深A股市场的经验研究

本文从静态和动态两个层面研究了会计信息的银行债务契约有用性。实证研究发现,上市公司基于会计信息的违约风险越大,银行信用借款比例越低;盈余质量越差则会显著降低违约风险与信用借款之间的关系;而在区分了长短期信用借款后,上述关系仅存在于短期信用借款之中。进一步研究发现,银企关系的好坏会显著影响长期信用借款的比例。这表明会计信息能降低银行债务契约决策中的信息不对称,但其有用性却受到盈余质量和债务期限的影响。     

The Effects of the Reporting of Off‐Balance‐Sheet Investments on EPS Uncertainty,Leverage and Shareholders’ Wealth

The degree of control over operations affects the quality of information provided to investors. Uncertainty about operating performance increases following the first equity method (EM) reporting of off‐balance‐sheet investments, but only when the investments are joint ventures (JVs). Partners in JVs report lower levels of debt. These results are not due to informational deficiencies of the EM, but to the riskier nature of JVs. Long‐run stock performance analysis indicates that investors experience normal risk‐adjusted returns when investing in firms with economically significant off‐balance sheet investments.     

Original-Issue Systematic and Default Risk Pricing Efficiency of Speculative-Grade Bonds

We investigate whether primary market, original‐issue risk premiums on speculative‐grade debt are justified solely by expected defaults or whether these risk premiums also include other orthogonal risk components. Studies of secondary‐market holding period risk and return have hypothesized that risk premiums on speculative‐grade debt may be explained by bond‐ and equity‐related systematic risk and possibly other types of risk. Using an actuarial approach that considers contemporaneous correlation between default frequency and severity and first‐order serial correlation, we cannot reject the hypothesis that the entire original‐issue risk premium can be explained by expected default losses. This suggests that speculative‐grade bond primary markets efficiently price default risk and that other types of risk are priced as coincident as opposed to orthogonal risks.     

An Analysis of the International Development of the Equity Method

The equity method was used as an early form of consolidation for all subsidiaries in the U.K. and for certain subsidiaries in the U.S. Another use of the method in some countries, even in the era of full consolidation, has been in the financial statements of investor legal entities. This seems to result from using the equity method as a technique for valuation or as an aid in the preparation of consolidated statements rather than as a form of consolidation. The method has also been used as a substitute for consolidation for excluded subsidiaries or for controlled companies not included in the definition of subsidiaries. Later, the equity method was introduced for joint ventures and then for other forms of 'strategic alliance', but the latter bring definitional problems, which have led to a consensus around an arbitrary threshold of 20 per cent of voting rights. This article traces these developments across time and space, and criticizes several of the past and present applications of the equity method. There is also an examination of the development of the terms 'equity method' and 'associated company'.     

Mandated accounting changes and debt covenants: The case of oil and gas accounting

The relationships among mandated accounting changes, bond covenants and security prices has been the focus of several studies. These studies have provided mixed evidence on the existence of a bond covenant effect on security prices. This paper suggests that inconclusive prior results are a consequence of inappropriately measuring the default risk of debt. Using an option pricing framework, it is shown that the debt to equity alone is not an adequate measure of default risk. In particular, both the debt to equity ratio and the total risk of the firm are necessary to adequately model the bond covenant effects of an accounting change. These theoretical propositions are supported by the empirical analysis of the security market reaction to changes in oil and gas accounting.     

SOME NEW EVIDENCE ON WHY COMPANIES USE CONVERTIBLE BONDS

The popular argument for convertibles holds that they provide issuers with "cheap" debt and allow them to sell equity at a premium over current value. Objecting to the "free lunch" implied by such an argument, financial economists have offered other explanations that show how the combination of debt and equity built into convertibles can serve to reduce information and agency costs faced by companies and their investors.
In this article, the authors use the results of their recent study to reconcile the two positions. Following Jeremy Stein's view of convertibles as "backdoor equity," the authors argue that convertible bond financing is an attractive alternative for companies that have large growth potential but find both conventional debt and equity financing very costly. Such companies are often deterred from funding their capital investments with straight public bonds by their high risk, relatively short track records, and high expected costs of financial distress. At the same time, the information "asymmetry" between management and outside investors can make equity very expensive in such cases. In layman's terms, management may feel that the company's share price does not accurately reflect its growth prospects, or be concerned that the mere announcement of a new equity offering will cause the share price to fall sharply.
To the extent the stock market is persuaded that management's choice of convertibles is based on this combination of promising growth prospects with limited financing options, it is likely to respond more favorably to the announcement of a new convertible offering. The authors furnish evidence in support of this argument by reporting that the market reacts less negatively to those convertible issuers with higher post-issue capital expenditures and higher market-to-book ratios, but with lower credit ratings and higher (post-offering) debt-equity ratios.     

The importance of state accounting practices for creditor decisions

This paper examines the association between state government accounting practices and creditor decisions. Creditor decisions were surrogated by yield premiums and variances of the premiums on general obligation debt securities. Accounting practices were summarized from the Council of State Governments Survey. In addition to these practices, accounting ratios and bond ratings were included as independent variables in regression models. The results demonstrated that accounting practices were not directly associated with the bond risk and return measures but may have been indirectly related as a result of their effect on bond ratings.     

An Investigation of the Relationship between Use of International Accounting Standards and Source of Company Finance in Germany

This study examines the relationship between use of international accounting standards and companies’ source of finance. We investigate the proposition contained in Nobes’ (1998) model that postulates outsider companies (those with a higher level of public finance) in weak equity–outsider markets (capital markets where public equity finance is not the dominant source of finance) are more likely to change their type of accounting system from one focused on information for creditors and tax authorities to one that meets the needs of external financiers. We found strong support for Nobes’ model. Using 408 German listed companies at 1999, we observed that companies with more outsider finance (the proportion of shares held by outsiders and the presence of public debt) were more likely to use international standards (U.S. GAAP or IAS). The results indicate the importance of controlling for source of finance at the company rather than country level in cross‐country studies investigating the benefits of adoption of international standards.     

Accounting for Joint Ventures and Associates in Canada, UK, and US: Do US Rules Hide Information?

Abstract:   Unlike US GAAP, accounting principles in Canada and the UK require disclosure of disaggregated components of joint ventures and associates. Using comparative analysis of Canadian, UK and US data, this study investigates the potential loss of forecasting and valuation relevant information from aggregating joint venture and associate accounting amounts. Findings show that aggregating joint venture and associate investment numbers, and aggregating joint venture revenues and expenses, each leads to loss of forecasting and valuation relevant information. Thus, current US accounting principles likely mask information that financial statement users could use to predict future earnings and explain share prices.     

The potential for expropriation through joint ventures

We examine the potential expropriation of a firm's intellectual capital that results from joint venture agreements when a firm's joint venture partner becomes the target of an acquisition attempt. We find that: (1) non-targeted joint venture partners often suffer losses in value upon the announcement of the acquisition; (2) the magnitude of the loss increases with the R&D intensity of the non-targeted joint venture partner; and (3) average bidder returns are less negative for acquirers if the affected joint venture partners report R&D spending and are in the same line of business as the acquirer. Our estimate of the average loss is $843 million per firm, roughly 3% of the non-targeted firm's pre-announcement equity value. Our evidence suggests a previously unrecognized merger motive in that joint ventures expose a firm's intellectual capital to the risk of expropriation.     

Demand for fair value accounting: The case of the asset revaluation boom in Korea during the global financial crisis

When the fair value accounting (FVA) option for property, plant, and equipment was introduced in the midst of the global financial crisis, a significant proportion of Korean firms elected FVA. We attribute this unusual boom in asset revaluations to the nation's culture of government intervention and civilian compliance, which was particularly espoused during this period of financial turmoil, and a foreseeable option to switch back to historical cost accounting. We find that among those firms whose debt‐to‐equity ratios are low, public firms opt for the FVA option more often than private firms, suggesting that the need to communicate fair value information with diversified equity holders is more important than the need to do so with creditors. In contrast, among those firms whose debt‐to‐equity ratios are high enough to warrant such unfavorable dispositions as new debt freezes and monitoring by regulators, we find no difference in the FVA choice between private and public firms. These findings imply that during the global financial crisis, private firms that rely heavily on debt financing have a strong incentive to utilize FVA to comply with government guidelines for the debt‐to‐equity ratio and to ease a potential hold‐up problem by influential creditors.     

Developing Dividend and Financing Policies with a Computer Terminal

This study examines the value relevance of mandated disclosures by UK firms of the investor‐firm share of liabilities of equity‐accounted associate and joint venture investees. It does so for the six years following the introduction of FRS 9: Associates and Joint Ventures, which forced a substantial increase in such disclosures by UK firms. Since the increased disclosure requirements were partly motivated by concern that single‐line equity accounting concealed the level of group gearing, and in light of previous US results, it is predicted that the mandated investee‐liability disclosures have a negative coefficient in a value‐relevance regression. The study also examines whether value‐relevance regression coefficients on investee‐liability disclosures are more negative for joint ventures than for associates and whether they are more negative in the presence of investor‐firm guarantees of investee‐firm obligations than in the absence of such guarantees. The study reports that the coefficient on all investee‐liability disclosures taken together has the predicted negative sign, and is significantly different from zero. It finds little evidence that the negative valuation impact of liability disclosures is stronger for joint venture investees overall than for associate investees overall, or stronger for guarantee cases overall than for non‐guarantee cases overall. There is, however, some evidence that the impact for joint venture guarantee cases is stronger than that for joint venture non‐guarantee cases and stronger than that for associate guarantee cases.     

Multiple corporate governance attributes and the cost of capital – Evidence from Germany

This paper investigates the extent to which corporate governance affects the cost of debt and equity capital of German exchange-listed companies. I examine corporate governance along three dimensions: financial information quality, ownership structure and board structure. The results suggest that firms with high levels of financial transparency and bonus compensations face lower cost of equity. In addition, block ownership is negatively related to firms' cost of equity when the blockholders are other firms, managers or founding-family members. Consistent with the conjecture that agency costs increase with firm size, I find significant cost of debt effects only in the largest German companies. Here, the creditors demand lower cost of debt from firms with block ownerships held by corporations or banks. My findings demonstrate that a uniform set of governance attributes is unlikely to satisfy suppliers of debt and equity capital equally.     

上市公司股东不可撤销表决权委托研究——问题、挑战与监管

表决权是上市公司股东参与管理决策的重要方式。证券监管实践表明,不可撤销表决权委托既有规避股份限售和减持规则的动机,也有出于增强控制权转让交易中博弈弹性的考虑。表决权委托并非一项简单的债权债务法律关系,其合规性及对证券市场的影响需引起足够的重视。为规范上市公司股东不可撤销的表决权委托,本文建议:在信息披露监管方面,重点关注表决权委托对权益变动、控制权稳定性、投资者保护的影响;在制度规范方面,发布表决权委托示范协议指引等规则,明确表决权委托的关键要素和监管要求。