RISKY DEBT MATURITY CHOICE IN A SEQUENTIAL GAME EQUILIBRIUM

In this paper the choice of risky debt maturity structure is analyzed in a sequential game framework. The focus is on the set of viable equilibria when there are no transaction costs associated with the choice of debt maturity structure. It is shown that when changes in firm value are independent over time, both short- and long-term debt pooling are Nash sequential equilibrium outcomes. However, only the short-term debt pooling outcome satisfies the universal divinity refinement. Relaxing the assumption of independent changes in firm value, it is demonstrated that a separating equilibrium in which higher-quality firms issue short-term debt and low-quality firms issue long-term debt may exist. Furthermore, conditions exist under which long-term debt pooling is the universally divine outcome.     

AN EMPIRICAL INVESTIGATION OF THE AUDIT EXPECTATION GAP: AUSTRALIAN EVIDENCE

This paper examines the existence and nature of the expectation gap in Australia and whether recent changes to the wording of audit reports have affected that gap. A mail questionnaire was completed by auditors, accountants, directors, creditors, shareholders and undergraduate students. There was a gap between auditors and the various user groups under the old report wording prior to the issuance of the revised AUP 3. The modified wording in the revised AUP 3 had a significant impact on beliefs about the nature of an audit and the relative responsibilities of auditors and management. The modified wording eliminated some of the differences, but also created some new differences in beliefs about the messages communicated through audit reports. The auditing profession's fears about an expectation gap appear to be justified.     

THE ROLE OF INFORMATION AND THE TIME BETWEEN TRADES: AN EMPIRICAL INVESTIGATION

Previous studies propose that the time between trades is a measure of the existence of information and a manifestation of the demand and supply of liquidity. I find evidence that the time between trades is a measure of the existence of information. However, the evidence does not imply that liquidity constraints are an unimportant determinant of price changes. Further investigation indicates that price changes are partially related to liquidity constraints, when the liquidity constraint is measured by the availability of multiple counterparties. Finally, I find some evidence that information about trades, not necessarily related to information about the underlying asset, also affects price changes.     

THE SLOPE OF THE TERM STRUCTURE OF CREDIT SPREADS: AN EMPIRICAL INVESTIGATION

In this article we analyze the slope of the term structure of credit spreads. We investigate the explanatory role of interest rate, market, and idiosyncratic equity variables that the recent empirical literature highlights as important determinants of credit spread levels. This study extends the analysis and assesses its effect on credit slopes for a sample of corporate bonds. We find that these factors affect credit spreads at short and long maturities in a significantly different way. A closer inspection of the credit spread slope also reveals that it is a useful indicator of the direction of changes in future short‐term credit spreads. This evidence has important implications for the trading and risk management of portfolios of bonds with different maturities.     

THE ELIMINATION OF DIRECTOR LIABILITY AND STOCKHOLDER RETURNS: AN EMPIRICAL INVESTIGATION

In this paper, the performance of the common stock of Delaware and non-Delaware firms is examined during the Delaware legislature's debate and approval of an amendment to the Delaware General Corporation Law permitting the elimination of director liability. In addition, stockholder returns surrounding the proxy and meeting dates for certain Delaware firms are examined. Results indicate that Delaware firms performed worse than non-Delaware firms during the legislative period; however, strong differences between the two groups are not documented.     

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.     

REORGANIZATION AND FINANCIAL DISTRESS: AN EMPIRICAL INVESTIGATION

Prior studies on financial distress focus on the restructuring of one aspect of the firm. By examining various forms of restructuring, we provide empirical evidence that asset restructuring and governance restructuring play significant roles before bankruptcy filing. Our analysis shows that financial restructuring before bankruptcy is influenced by the holdout problem among creditor groups. Evidence suggests that the fraudulent conveyance provision does not pose a serious impediment to divestitures during the two years before bankruptcy. The evidence also indicates that Chapter 11 reorganization is lenient toward management. Although Chapter 11 allows the firm to breach burdensome executory contracts with employees, our findings suggest that union busting is not an important part of the reorganization process. Finally, we identify various financial characteristics to predict the different types of restructuring a firm may undertake.     

INTERNALIZATION AND MARKET QUALITY: AN EMPIRICAL INVESTIGATION

We explore the relation between market quality and internalization through a pre- and postenactment analysis of the implementation of the Toronto Stock Exchange (TSE) Price Improvement Rule on October 26, 1998. We find that the rule revision is accompanied by falls in the bid–ask spread and the variance of the pricing error and by rising internalization rates. This study informs proponents of market concentration, brokers, dealers, exchange administrators, and market regulators that a judicious regime of regulated internalization may be associated with superior market effectiveness.