Abstract Institutional investors have strong incentives to search for private predisciosure information about companies in their portfolios because of their fiduciary responsibilities and large resource bases. In addition, large institutional ownership may induce a high level of voluntary disclosure prior to earnings announcements. Greater private information acquisition and greater levels of voluntary disclosures prior to earnings releases suggest that the content of the earnings releases by firms with higher institutional ownership is partially preempted in predisciosure market prices. This paper tests the hypothesis that the market price response to the earnings announcements is smaller for securities with higher institutional holdings. The empirical tests provide evidence that the higher the institutional holdings, the lower the market reaction to earnings releases after controlling for security capitalization and the number of analysts following the firm.

[Institutional investors have strong incentives to search for private predisclosure information about companies in their portfolios because of their fiduciary responsibilities and large resource bases. In addition, large institutional ownership may induce a high level of voluntary disclosure prior to earnings announcements. Greater private information acquisition and greater levels of voluntary disclosures prior to earnings releases suggest that the content of the earnings releases by firms with higher institutional ownership is partially preempted in predisclosure market prices. This paper tests the hypothesis that the market price response to the earnings announcements is smaller for securities with higher institutional holdings. The empirical tests provide evidence that the higher the institutional holdings, the lower the market reaction to earnings releases after controlling for security capitalization and the number of analysts following the firm.]

[This article examines the association between lessees' market returns and their changes in the tightness of the debt covenant constraints resulting from compliance with SFAS No. 13 (1976). This paper differs from previous research in that it uses covenant-based measures. Similar to Hughes and Ricks (1984) and Schipper and Thompson (1983), it examines cross-sectional stock return dependencies that exist when industry effects cannot be randomized over time. The paper begins by identifying a sample of lessees who retroactively capitalized leases as a result of SFAS No. 13. Actual debt contracts of sample firms are then analyzed to identify accounting-based restrictions, the default value of each restriction, and the definition of the accounting variables used in the covenant. Next, the percentage increase in the tightness of covenant restrictions arising from adopting SFAS No. 13 is calculated. Finally, cross-sectional tests of the relationship between changes in covenant tightness and changes in security prices that accompanied the events leading to SFAS No. 13 are performed. The analyses reveal several results. First, retroactive capitalization of off-balance sheet leases would have caused significant increases in the tightness of the debt covenant restrictions. Second, affected lessees experienced negative market returns contemporaneously with the disclosure of two of the events that led to the promulgation of SFAS No. 13. However, the magnitude of the reduction in market returns is correlated with the impact of SFAS No. 13 on the tightness of debt covenant restrictions. Finally, there appear to be important differences in the structure of debt covenants. Private debt covenants have tighter financial restrictions, while public debt covenants have more nonaccounting-based provisions such as sinking fund, security, and seniority of the debt.]

Abstract This article examines the association between lessees' market returns and their changes in the tightness of the debt covenant constraints resulting from compliance with SFAS No. 13 (1976). This paper differs from previous research in that it uses covenant-based measures. Similar to Hughes and Ricks (1984) and Schipper and Thompson (1983), it examines cross-sectional stock return dependencies that exist when industry effects cannot be randomized over time. The paper begins by identifying a sample of lessees who retroactively capitalized leases as a result of SFAS No. 13. Actual debt contracts of same pie firms are then analyzed to identify accounting-based restrictions, the default value of each restriction, and the definition of the accounting variables used in the covenant. Next, the percentage increase in the tightness of covenant restrictions arising from adopting SFAS No. 13 is calculated. Finally, cross-sectional tests of the relationship between changes in covenant tightness and changes in security prices that accompanied the events leading to SFAS No. 13 are performed. The analyses reveal several results. First, retroactive capitalization of off-balance sheet leases would have caused significant increases in the tightness of the debt covenant restrictions. Second, affected lessees experienced negative market returns contemporaneously with the disclosure of two of the events that led to the promulgation of SFAS No. 13. However, the magnitude of the reduction in market returns is correlated with the impact of SFAS No. 13 on the tightness of debt covenant restrictions. Finally, there appear to be important differences in the structure of debt covenants. Private debt covenants have tighter financial restrictions, while public debt covenants have more nonaccounting-based provisions such as sinking fund, security, and seniority of the debt.

This paper explores how private contracts tailor GAAP and whether tailoring reflects the characteristics of the contracting parties. The analysis reveals that contracts of bank and insurance lenders are different with bank agreements closer to public debt. Tailoring is one of several characteristics associated with insurance lending agreements. The extensive tailoring of GAAP income in insurance contracts enforces dividend and payout restrictions that are consistent with the interest of long-term insurance lenders. In contrast, bank lenders deal with borrowers' default risk by negotiating shorter maturities, security, sinking funds, and loan syndication.

This study examines factors that affected managements' choices in accounting for leases prior to the implementation of SFAS No. 13. Empirical evidence indicates that financial contracting and management bonus incentive variables help explain the choice. Empirical results do not support the political cost hypothesis; rather, tax return considerations also seem to influence managements' lease accounting choice.

Abstract. This paper explores restrictions in private lending agreements to determine how contractors' status affects (1) the number of limitations on managerial actions and (2) tightness (or slack) of contract restrictions at contract inception. The major result of the multivariate tests is that highly leveraged borrowers are forced to negotiate agreements with both more numerous and tighter restrictions. Debt contracts represent a series of rational trade‐offs. Firms with higher debt face more restrictions, which are tighter and more likely to restrict managerial actions. Similarly, borrowers are more likely to agree to tighter extensive restrictions in exchange for more substantial loans. The evidence also indicates that larger firms that possess greater resources to avoid default are able to negotíate looser agreements that contain fewer restrictions. Secured loans do not impose a large number of accounting‐based restrictions on managements' actions because secured lenders have less need to restrict managements' options. However, long‐term agreements, including insurance loans, include more restrictions on dividends and payout options but use covenant ratios to allow management the flexibility needed over the course of a long‐term loan. Résumé. Les auteurs étudient les clauses restrictives des contrats de prêt privés afin de déterminer comment la situation des contractants influe sur 1) le nombre des limites imposées à la direction dans sa marge de manoeuvre et 2) la rigueur (ou la malléabilité) des restrictions contractuelles au début du contrat. Une constatation principale résulte des tests à plusieurs variables aléatoires: les emprunteurs dont le levier financier est important se voient contraints de négocier des contrats contenant à la fois des restrictions plus nombreuses et plus rigoureuses. Les contrats d'emprunt sont en quelque sorte une série de compromis rationnels. Les entreprises dont la dette est plus élevée font face à davantage de restrictions, qui sont plus limitatives et plus susceptibles de réduire la marge de manoeuvre de la direction. D'autre part, les emprunteurs sont plus enclins à accepter que leur soient imposées des restrictions plus rigoureuses et plus nombreuses, en échange de prêts plus substantiels. Les résultats de la recherche révèlent également que les entreprises plus grandes disposant de ressources plus importantes qui diminuent le risque de non‐remboursement sont en mesure de négocier des ententes plus souples qui contiennent moins de restrictions. Les prêts garantis n'imposent pas beaucoup de restrictions comptables à la marge de manoeuvre de la direction, puisque les prêteurs garantis éprouvent moins la nécessité de restreindre les options de la direction. Toutefois, les contrats à long terme, parmi lesquels les prêts de compagnies d'assurance, comportent davantage de restrictions relatives aux dividendes et aux options de remboursement mais prévoient dans leurs clauses restrictives des ratios moins sévères, de faccon à assurer à la direction la souplesse qui lui est nécessaire pendant toute la durée des prêts.