Accounting History, Double-entry Bookkeeping, Negative numbers

Three alternative characterizations of corporate debt management policy, which have had wide currency in the literature, are examined. They are shown to give rise to substantial differences in their predictions of total-firm value. This study concludes that, of the three, the one that assumes that management periodically rebalances the firm's debt levels in response to evolving new information on expected future operating cash flows is the most logically consistent. On that basis, a reinterpretation of the available empirical evidence on the “tax effect” of debt is indicated.

Since Bowlin's [4] original article on the topic was published, a considerable literature on corporate bond refunding has developed. Most of that literature has concentrated on the question of how to measure the benefit to a company's shareholders of exercising the call provision associated with an outstanding debt issue (see [3], [12], [21], [26], [27], [29], and [31]). Among the related concerns have been the matters of whether there are valuation advantages to the deliberate issuance of discount—including “zero coupon”—bonds (see [9], [22], and [28]), and whether there can be profitable opportunities for refunding prior to maturity debt instruments that were issued at par but later trade at a discount (see [1], [2], [13], [15], [17], [18], and [23]).

The rapid advancement of technology leading to quicker obsolescence, shorter life cycles, and more intensive competition has resulted in renewed emphasis on the abandonment and replacement decision in the analysis of investment projects. Once an investment was undertaken, many corporations in the past often abandoned a project only when it either suddenly ceased to function, or else when it became so unprofitable that abandonment was literally forced. Several authors have demonstrated that a project could be abandoned well before any of these terminal conditions existed. Robicheck and Van Home, for instance [14], showed that an asset could be abandoned even though it may be expected to generate positive cash flows in subsequent years. Dyl and Long (DL) [6], in a modification to the Robichek and Van Home (RVH) model regarding the year of abandonment, suggested that rather than abandoning a project at the earliest time–whenever the abandonment value exceeded the present value of all subsequent future flows– all possible cases of abandonment over the life of the asset should be considered. In this manner, the procedure is to select the highest net present value of an asset over all cash flow and abandonment possibilities. This result particularly holds when all projects have the same degree of risk and when there are frictionless markets and no capital rationing.

The lessons of the leasing literature concerning the impact of leases on the debt capacity of a firm are reviewed and summarized to establish an approach to the analysis of the corporate bond refunding decision. A general proposition regarding financial obligation parity is established, and from that a clear bond refunding decision rule is developed. Previous debates in the literature about appropriate discount rates and about the appropriate cash flows to be discounted for refunding decisions are clarified.

We compare reactions in the prices and trading patterns of common stocks and closed-end funds (CEFs), securities with substantially different investor clienteles, to the Sept. 11, 2001 terrorist attacks. When the market reopened 6 days later, retail investors sold and there were sharp price declines, even in assets with net institutional buying. In the subsequent 2 weeks, price reversals were substantially security specific and thus not simply due to improved systematic sentiment. Consistent with microstructure theory, comparisons between CEFs and common stocks show the speed of these reversals depended significantly on the relative quality and availability of information about fundamental values.

We investigate the (sell-side) analyst rankings of Institutional Investor (I/I) and The Wall Street Journal (WSJ), using data from 1993–2005. We find that factors with a primary component of recognition are the most important determinants of the rankings, although performance measures are statistically significant determinants in some cases. The single exception to this finding is with existing WSJ stars, where industry-adjusted investment-recommendation performance is the only significant determinant of repeating as a star. Further, in the year after becoming stars, the recommendations of WSJ stars are significantly worse than those of nonstars; and the recommendations and earnings forecasts of I/I stars, as well as the earnings forecasts of WSJ stars, are not significantly different from those of nonstars. We conclude that these rankings are largely “popularity contests.”

In a previous study reported here Moriarity and Barron [1976] used conjoint measurement to model the materiality judgment process of audit partners. They did so following the approach suggested by Krantz and Tversky [1971] in which axiomatic conjoint measurement (ACM) is used to identify the functional form of the decision maker's judgment model, and then numerical conjoint measurement (NCM) is applied to find the best-fitting scale values (part-worth functions).' Shortly thereafter, the American Accounting Association's Committee on Human Information Processing (AAA [1978]) suggested that conjoint measurement would be useful in the study of certain aspects of human information processing in accounting research, particularly for testing alternative composition rules which uses only ordinal properties of the data [1978, p. 32]. Composition rules refer to the functional forms (e.g., additive, multiplicative, etc.) of decision makers' judgment models.2 In a later paper, Moriarity and Barron [1979] examined the preaudit materiality judgments of audit partners, in which they assumed an additive model and used a holistic orthogonal parameter estimation procedure (Barron and Person, [1979]). Swieringa [1979] criticized this