This paper investigates effects of going-private buyout proposals made from 1974 to 1985 on the value and default risk of convertible and nonconvertible debt and preferred stock securities. Positive average price reactions are documented for public convertible securities and nonconvertible preferred stock; many of these issues are redeemed as part of the buyout. Most nonconvertible debt securities remain outstanding without renegotiation after buyouts, and minimal average price reactions are documented for public nonconvertible debt. Following successful buyouts the proportion of debt in the capital structure more than triples on average, and most rated debt securities experience downgradings in Moody's ratings.

Financial reporting, Value relevance, Usefulness, Information environment

We contrast the informativeness of earnings and dividends for firms with dual class and single class ownership structures. Results of both across-sample tests (which explicitly control for factors influencing ownership structure and informativeness) and within-sample tests (which implicitly control for factors associated with ownership structure) show that earnings are generally less informative, and dividends are at least as (if not more) informative, for dual class firms. We interpret these results as suggesting that the net effect of dual class structures is to reduce the credibility of earnings and to enhance the salience of dividends as measures of performance.

We investigate whether competing information, primarily analyst reports, reduces the usefulness of earnings announcements. Inconsistent with the view that information in analyst reports substitutes for earnings announcements, we find a positive relation between absolute abnormal returns to the two types of disclosures. This positive relation also characterizes subsequent period analyst reports relative to current period earnings announcements. We also find that aggregate absolute reactions to both types of disclosures increased over 1986–1995. As a whole, these results provide little support for the view that the informativeness of earnings announcements is eroded by competing information in the form of analyst reports.

We analyze the ability of earnings and non‐earnings performance metrics to explain the variability in annual stock returns for industries where we identify, ex ante, an allegedly preferred (for valuation purposes) summary performance metric. We identify three industries where earnings before interest, taxes, depreciation, and amortization (EBITDA) and cash from operations (CFO) are preferred, and three industries where specific non‐GAAP performance metrics are preferred. As a benchmark, we also examine the ability of EBITDA and CFO to explain returns for seven industries for which earnings is the preferred metric. Results for the benchmark earnings industries show that earnings dominates EBITDA and CFO in explaining returns. All other results are inconsistent with the view that perceptions of preferred metrics are reflected in actual aggregate investment behaviors.

Disclosures, Litigation risk, Rule 10b-5, Discretionary disclosures

This paper estimates the magnitude of tax costs and their impact on the decision to divest assets via a taxable sale rather than a tax-free spin-off. We find that the tax costs are substantial, averaging 8% of market value of the divested assets, and that cross-sectional variation in tax costs has a large impact on managers’ choice of divestiture method. Our results are consistent with two explanations. First, managers are willing to incur avoidable tax costs to gain earnings and cash flow benefits. Second, managers choose taxable sales because the acquisition premia on the sales exceed the avoidable tax costs.

Actuarial cost methods designed for funding decisions about pensions are not necessarily designed for use in accounting reports about pensions. Various actuarial cost methods are explained and illustrated, with particular attention to varying treatment in these methods of "actuarial accrued liability," formerly called "prior service cost." Some actuarial cost methods generate actuarial accrued liability, while others do not. The FASB has required pension plans to use an actuarial cost method that in many cases reports a lower present value for the pension obligation in the early years of a pension plan than had been reported by the actuarial cost method formerly used by the employer. The degree of reduction in net present value of the pension obligation is reported for a sample of companies.

This article presents comments on Harold Wyman's article "Financial Lease Evaluation Under Conditions of Uncertainty," published in the July 1973 issue of the journal "The Accounting Review." When operating costs and eventual scrap value under the buy/borrow alternative are random variables, with known distributions, Wyman shows how computer simulation can be used to provide both the expected value of the interest costs under each of the two alternatives and the statistical distribution of those costs. Wyman suggests two possible ways to evaluate leases: (1) Calculate the after-tax interest cost equivalent of the lease contract and the internal rate of return or IRR; (2) Calculate the after-tax net present value (NPV) of both the leasing and buy/borrow alternatives and accept the alternative with the higher net present value, provided that the NPV is positive. Even when the two modes of analysis lead to the same decision, the NPV method is easier to compute, and hence cheaper to implement than the IRR method. Under the lease alternative, separating the operating elements from the financing elements requires treating the lease as a form of debt financing. Although this treatment is not yet acceptable for financial accounting purposes, valid economic analysis and decision-making require it.

We provide large‐sample archival evidence on the nature and consequences of errors deemed immaterial to the previously issued financial statements containing the errors (immaterial errors). The incidence of immaterial error corrections has been increasing since about 2004, and these corrections are associated with modestly and discernibly negative share returns that are more negative for income‐decreasing corrections and corrections that involve multiple issues. We find that immaterial errors are a leading indicator of poor reporting reliability as measured by future material and immaterial reporting errors, material weaknesses in internal controls, and SEC comment letters. Our findings suggest that immaterial errors provide researchers and investors with a more frequent and less severe indicator of potential audit or financial reporting issues as compared to more extreme reporting problems such as material errors corrected by restatements.