ABSTRACT The ownership of pension assets in a defined benefit pension plan is an unresolved issue in corporate finance. The issue is important because it defines the appropriate investment policy for a pension fund. In this paper, we summarize the ownership debate in the form of two mutually exclusive theories. We then focus on a recently popular event in pension finance, excess asset reversions. Our paper demonstrates the valuation effects associated with this event in a stochastic dominance framework. Under certain conditions, a reversion constitutes an expropriation of wealth from the participants and beneficiaries of the plan to the firm. Using data provided by the Pension Benefit Guaranty Corporation and the Center for Research in Security Prices tape, we examine the returns to the shareholders of 58 companies which conducted excess asset reversions between 1980 and 1984. Our results show that large abnormal returns accrued to these shareholders around the time of the reversion. These findings have implications both for the appropriate investment policy of pension funds and for public policy with respect to plan terminations.

[This study investigates the association between going concern opinions and the market's reaction to bankruptcy filings. The results of prior studies indicate that going concern opinions are useful in predicting bankruptcy and provide some explanatory power in predicting bankruptcy resolution. As such, going concern opinions may reduce the surprise associated with bankruptcy. Our results are consistent with this assertion. Firms receiving going concern opinions experience less negative excess returns in the period surrounding bankruptcy filings than those receiving unqualified opinions. These results hold after controlling for the probability of bankruptcy, the market's reaction to news announcements occurring prior to bankruptcy, and changes in stock price prior to the issuance of the auditor's report. Overall, our results are consistent with going concern opinions having information value.]

Kevin C. W. Chen, Michael P. Schoderbek, The 1993 Tax Rate Increase and Deferred Tax Adjustments: A Test of Functional Fixation, Journal of Accounting Research, Vol. 38, No. 1 (Spring, 2000), pp. 23-44

[Oil and gas firms using the full cost method during 1985-1986 faced a choice between taking a write-down in oil and gas properties or changing to the successful efforts method. In a time-series analysis, the executive bonuses of firms switching to the successful efforts method are found to be associated with accounting income, suggesting the effects of bonus plans on the switch decision. We also show that the firms choosing write-down reported more losses before the write-down during the decision year, and that the bonuses of these firms' executives are not affected by the write-down.]

[Positive theory hypothesizes that accounting-based debt covenants are important factors in accounting choices. According to Watts and Zimmerman's (1990) survey, this hypothesis has generally been supported by earlier studies. That is, the closer the firm is to violating accounting covenants, the more likely managers would choose income-increasing methods. Recently, research attention has shifted to the event of covenant violation itself. For example, Beneish and Press (1993) estimate debtors' costs of violations. Further, DeFond and Jiambalvo (1991) and Sweeney (1992) examine debtors' manipulative behavior before covenant violations. These latter studies find that violations of accounting covenants are costly to debtors, who generally try to manipulate accounting numbers to avoid or defer technical defaults. The present study also focuses on the event of violation, but from the perspective of creditors. It explains two aspects of creditors' decision process following covenant violations. First, we find that creditors react to actual violations in two distinct ways: they could either waive the violations or could demand certain conditions such as early payment, increase of interest rate, reduction of borrowing base, and so forth. Second, we also model creditors' decisions either to waive or to call the debt using the option-pricing framework. We hypothesize that the determinants of waiver decisions include the firm's bankruptcy probability and leverage ratio. Moreover, maturity, size, and security of the debt issue involved should also be important factors in the waiver decisions. Empirically, we find that creditors are more likely to grant a waiver to the firm with a lower estimated probability of bankruptcy and a lower leverage ratio. Further, debt issues that are secured or smaller in size are more likely to have violations waived than unsecured or larger issues. The maturity variable, however, is not found a significant determinant of the waiver decisions. Using the factors identified in this study, managers can assess the probability of receiving a waiver and prepare necessary strategies to ensure the firm's survival. Auditors also can use those factors to assess the possibility of the client's receiving a waiver of covenant violation as part of their evaluation of the firm's ability to continue as a going concern. Moreover, since debtors prefer waivers to nonwaivers, the prospect of receiving a waiver is likely to influence managerial behavior, including the choice of accounting alternatives. Managers expecting a nonwaiver from creditors would have more incentive to select accounting methods to avoid covenant violations.]

A major function of financial statement analysis is to assess the risk of financial distress. Since Beaver's (1966) and Altaian's (1968) pioneering works, voluminous studies have been devoted to exploring the use of accounting information in predicting business failure. We apply survival analysis to study a class of financial distress when a financial analyst can identify an event that sets off the dynamic process of business adversity and would like to find out how long a firm can endure the adversity. We use the case of the oil and gas industry during the turmoil of the early 1980s and apply survival analysis to study how long a firm can endure this drastic oil price decline before facing financial distress. Our results indicate that the liquidity ratio, leverage ratio, operating cash flows, success in exploration, age, and size are significant factors affecting corporate endurance. Résumé. Une fonction majeure de l'analyse des états financiers consiste à évaluer le risque de difficultés financières. Depuis les travaux d'amorce de Beaver et Altman, de volumineuses études ont été consacrées à l'analyse approfondie de l'utilisation de l'information comptable dans la prédiction des faillites d'entreprises. Les auteurs appliquent l'analyse de survie à l'étude d'une catégorie de difficultés financières pour laquelle l'analyste financier parvient à déterminer un événement qui déclenche le processus dynamique des difficultés de l'entreprise et aimerait déterminer pendant combien de temps cette dernière pourra résister à ces difficultés. Les auteurs évoquent le cas du secteur pétrolier et gazier au cours de la période tumultueuse du début des années 80 et appliquent l'analyse de survie à l'étude du temps pendant lequel une entreprise pouvait résister à un déclin radical du prix du pétrole avant d'éprouver des difficultés financières. Les résultats de l'étude démontrent que le ratio de liquidité, le ratio de levier, les flux monétaires provenant de l'exploitation, le succès des activités d'exploration, l'âge et la taille de l'entreprise sont des facteurs importants qui influent sur sa résistance.

International Financial Reporting Standards ( IFRS ) allow firms to record adjustments (gains or losses) from the revaluation of investment properties in their income statements. After Hong Kong adopted IFRS in 2005, property companies were required to move their revaluation gains and losses ( RGL ) from equity to income. We find RGL to be a significant determinant of executive compensation in these firms after 2005, but not before. We further find evidence that the RGL ‐compensation association is driven by firms with relative weak corporate governance structure, such as firms in which the controlling shareholders own a relatively small percentage of shares, firms in which the controlling shareholders have control rights that exceed ownership rights, and firms that are no longer run by their founders.

From 1996 to 1998, listed companies in China were required to achieve a minimum return on equity (ROE) of 10 percent in each of the previous three years before they could apply for permission to issue additional shares. As a result of this rule, there was a heavy concentration of ROEs in the area just above 10 percent. We show that the Chinese regulators appear to have scrutinized firms using excess amounts of nonoperating income to reach the 10 percent hurdle. In addition, their ability to do so seems to have improved over time, which allows them to be better able to identify firms that subsequently performed better. However, many firms were still able to gain rights issue approval through excess nonoperating income. We show that these firms subsequently underperformed other approved firms that did not use the same practice, indicating that the Chinese regulators' objective of guiding capital resources toward the well-performing sectors is partially compromised by earnings management.