ABSTRACT We investigate the effect of growth opportunities in a firm's investment opportunity set on its joint choice of leverage, debt maturity, and covenants. Using a database that contains detailed debt covenant information, we provide large‐sample evidence of the incidence of covenants in public debt and construct firm‐level indices of bondholder covenant protection. We find that covenant protection is increasing in growth opportunities, debt maturity, and leverage. We also document that the negative relation between leverage and growth opportunities is significantly attenuated by covenant protection, suggesting that covenants can mitigate the agency costs of debt for high growth firms.

ABSTRACT We examine the wealth effects of mergers and acquisitions on target and acquiring firm bondholders in the 1980s and 1990s. Consistent with a coinsurance effect, below investment grade target bonds earn significantly positive announcement period returns. By contrast, acquiring firm bonds earn negative announcement period returns. Additionally, target bonds have significantly larger returns when the target's rating is below the acquirer's, when the combination is anticipated to decrease target risk or leverage, and when the target's maturity is shorter than the acquirer's. Finally, we find that target and acquirer announcement period bond returns are significantly larger in the 1990s.

Starting from an initial (baseline) budget line, income-compensated price changes always resulted in substitution effects consistent with the Slutsky-Hicks theory. This behavior cannot be explained by a simple random-behavior model. Similar changes in relative prices that did not originate from the initial (baseline) budget line resulted in "undersubstitution effects": The composition of consumption changed in the expected direction, but the magnitude of change was not large enough to be consistent with the initial commodity bundle chosen. These undersubstitution effects are not explainable by shifting preference patterns or anchoring effects found in inconsistent choice sequences with human subjects.

ABSTRACT We examine the timing of returns around the publication of anomaly trading signals. Using a database that captures when information is first publicly released, we show that anomaly returns are concentrated in the first month after information release dates, and these returns decay soon thereafter. We also show that the academic convention of forming portfolios in June underestimates predictability because it uses stale information, which makes some anomalies appear insignificant. In contrast, we show many anomalies do predict returns if portfolios are formed immediately after information releases. Finally, we develop guidance on forming portfolios without using stale information.

SCOPUS: ar.j

ABSTRACT This study examines whether politicians exhibit hometown favoritism in assigning preferential corporate income tax rates. We find that firms with hometown connections to incumbent provincial leaders experience favorable tax treatment. This effect is more pronounced when those leaders have strong hometown preferences and weaker when they have a strong incentive to seek promotion, suggesting that social incentives are the primary drivers of the effects on corporate tax benefits of hometown favoritism by politicians. Moreover, this effect is intensified when members of senior management have personal connections with the provincial leader. The mechanism test reveals that the provincial governments tend to qualify connected firms for preferential tax policies under their jurisdictions. Overall, our results suggest that hometown favoritism by politicians promotes tax benefits for business entities. Data Availability: Data are available from the public sources cited in the text. JEL Classification: H26; H71; M48.

ABSTRACT Using the Regulation SHO program as a quasi-experiment, we document that the threat of short selling has a negative effect on the volume of opportunistic insider selling and a positive effect on its profitability for each transaction. These effects are stronger among firms with higher litigation risk, greater media coverage, and executives who have more of their firms' stock-related holdings. We further find robust evidence when we extend the analyses to short selling deregulations in the Chinese and Hong Kong stock exchanges. Overall, our findings suggest that short sellers play a disciplinary role in opportunistic insider selling. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: D8; D53; G14; G18.

Abstract The article focuses on recommendations presented by the American Accounting Association's Committee on Concepts and Standards, regarding the use of term "reserve" in accounting. The committee recommended that the term reserve should not be employed in published financial statements of business corporations, appropriations of retained income should not be made or displayed in such a manner as to create misleading inferences, and the reserve section in corporate balance sheets should be eliminated and its elements exhibited as deduction-from-asset, or liability, or retained income amounts. In general usage, outside of accounting, a reserve is a fund of cash or other assets. In accounting the term has been used to caption a variety of balance sheet items including segregated retained income, segregated asset, asset valuation and asset amortization amounts, and liabilities. It has been recommended that the word reserve be restricted to captions describing appropriated retained income. The committee believes that the popular understanding of financial statements, and the thinking of the profession, would be promoted by abandoning the term.

ABSTRACT We offer the first empirical evidence on the adverse effect of credit default swap (CDS) coverage on subprime mortgage defaults. Using a large database of privately securitized mortgages, we find that higher defaults concentrate in mortgage pools with concurrent CDS coverage, and within these pools the loans originated after or shortly before the start of CDS coverage have an even higher delinquency rate. The results are robust across zip code and origination quarter cohorts. Overall, we show that CDS coverage helped drive higher mortgage defaults during the financial crisis.