Knowledge that Transforms

Research suggests that leveraged buyouts create value through significant operating performance improvements. There is little evidence that buyouts lead to widespread employee layoffs, wage reductions, or wealth transfers from bondholders. LBOs continue to be controversial, however. Future research should focus on the effect of buyouts on firms' strategic investments, buyout firms' performance under difficult economic conditions, and the frequency and costs of financial distress associated with buyouts. Research can also focus on improving the performance of public corporations by examining the individual contributions of debt, management ownership, and corporate governance changes to podt-buyout performance.

We provide a positive analysis of a firm's decision to report the operations of a financial subsidiary on a consolidated versus an unconsolidated basis. Our evidence indicates that the firm is more likely to choose consolidated reporting the greater the operating, financial, and informational interdependencies between parent and subsidiary. Moreover, our evidence offers no support for the FASB hypothesis that firms use unconsolidated financial subsidíaries to understate the fixed claims on their balance sheets.

In this issue Duke and Hunt and Press and Weintrop show that leverage is significantly related to the existence of, and closeness to, accounting-based debt covenants. Alternative rationales for this relation are presented. The theory requires more rigorous specification to define closeness to covenants and determine which measure of leverage produces a more appropriate proxy for closeness to covenants. Then Healy and Palepu investigate a sample of firms close to their dividend restriction and find in general they are no more likely than other firms to change accounting methods. Their sample selection criteria reduces the generalizability of their results.

This paper demonstrates that the market reaction to announcements of seasoned stock offerings varies with the presence of outside agents - accounting firms, commercial banks, and underwriters - who monitor the firm. The stock price reaction is a positive function of the quantity of bank debt in a firm's financial structure, the quality of the firm's investment banker, and the quality of the public accounting firm that serves as its external auditor. The evidence supports theoretical models that imply external agents audit, monitor, and certify decisions to issue seasoned common stock.

This paper argues that audit firms achieve competitive advantages through specialization, and that clients purchase audit services from the least cost supplier. Client-auditor realignments thus represent efficient responses to changes in client operations and activities over time. Results obtained from analyzing the financial characteristics and share price performance of corporations that changed auditors between 1973 and 1982 support the view that realignments can generally be attributed to cross-temporal changes in client characteristics and differences in audit firm cost structures.

This paper presents a statistical procedure to identify effects of three potential structural changes on accounting earnings – temporary, short-run, and long-run. The procedure is applied to quarterly accounting earnings of 39 utility companies. Structural changes are found to be commonplace. Statistical forecasting models that explicitly incorporate structural change effects are found to generate more accurate forecasts than other statistical models in the literature. Although no statistical model significantly dominates Value Line, a firm-specific model with structural change adjustment forecasts as well as Value Line. Moreover, all statistical models examined have significant marginal forecasting power to complement Value Line forecasts.

In the preceding paper Christie provides three tests to facilitate formal inferences in survey papers that examine related empirical studies. Those tests reinforce the view that accounting technique choice is related to variables that may proxy for contracting and monitoring costs in the market and political processes. However, the contribution of the tests is limited because the fundamental question of the relation between the empirical regularities and the theory remains unexamined.

Three alternative, but not mutually exclusive, perspectives on accounting method choice are contrasted: the opportunistic behavior, efficient contracting, and information perspectives. Much of the empirical work on accounting method choice is based on the opportunistic behavior perspective. The Malmquist and Main and Smith papers are attempts to view accounting method choice as a means of improving the monitoring capabilities of contracts which rely on accounting numbers. The papers serve as useful vehicles for illustrating the difficulties of delineating a set of maintained assumptions that result in hypotheses about how accounting method choice affects the monitoring characteristics of contracts, and distinguishing between hypotheses based on the three perspectives on accounting method choice.

For a random sample of 83 firms, we show that public and private debt agreements filed at the SEC yield a more comprehensive set of accounting constraints than annual reports or Moody's. For firms with accounting constraints, measures of proximity to leverage, net worth, and working capital constraints are significantly correlated to leverage. We incorporate constraint-related data into Zmijewski and Hagerman's (1981) income strategy model. Both a leverage constraint indicator and leverage are significantly associated with accounting choice. This suggests that leverage is proxying for factors in addition to the existence of accounting-based constraints.

Using the model of discretionary disclosure suggested in Verrecchia (1983), I show that an increase in the quality of private information received by a manager results in more disclosure on his part. I also discuss how this result influences a manager's choice over levels of quality.