Proposes and tests a probabilistic extension of the efficient market hypothesis toward the functional fixation hypothesis (FFH). Calendar time positioning of the swap announcement and swap quarter's earnings; Debt-equity swaps as a test of extended FFH (EFFH); Empirical methods.

This study examines the testable implications of two hypotheses for why firms undertook debt-equity swaps over the period August 1981-June 1984. The first hypothesis Is that firms used the accounting-based reported earnings gain from the swap to smooth an unexpected and transitory decrease in their earnings per share. The second hypothesis Is that a swap enabled the firm to relax potentially binding sinking-fund constraints in the cheapest feasible manner. Empirically, this study concludes that firms undertook debt-equity swaps for both reasons, but that swapping to smooth earnings was a much stronger motivation than swapping to relax potentially binding sinking-fund constraints.

In this paper we outline three ways that experimental methods can add value to academic accounting research, practice, and particularly standard setters such as the Accounting Standards Board (AcSB), the Financial Accounting Standards Board (FASB), and the International Accounting Standards Committee (IASC). Through examples, we illustrate that, compared to archival methods, experimental methods can have three advantages in supplying evidence on questions that are important and relevant to financial accounting prescriptions. These advantages are timeliness, inclusiveness, and causality. First, experimental methods can be more timely in that experiments can be designed to provide evidence on an ex ante basis. This advantage particularly applies when there are no relevant archival data available and/or no close historical substitutes for a proposed accounting standard. Second, experiments can be more inclusive. They can test a spectrum of standard‐setting solutions that the archival approach precludes for lack of available data. Finally, experimental methods can powerfully isolate and measure the direction and strength of cause‐effect relations. In their decision making, standard setters require knowledge on the nature and cause of intended and unintended consequences of proposed and already promulgated standards. Therefore, cause‐effect evidence is a critical and valuable input to their deliberations. Résumé. Les auteurs décrivent trois façons d'augmenter, grâce aux méthodes expérimentales, la qualité de la recherche universitaire en comptabilité, de l'exercice de la profession comptable et, en particulier, du travail de normalisation comptable auquel se livrent des organismes comme l'Accounting Standards Board (AcSB), le Financial Accounting Standards Board (FASB) et l'International Accounting Standards Committee (IASC). Par des exemples, les auteurs illustrent le fait que les méthodes expérimentales peuvent présenter trois avantages, par rapport aux méthodes d'archivage, dans la documentation des questions d'importance pertinentes aux normes de comptabilité financière: la rapidité, l'intégralité et la causalité. En effet, les méthodes expérimentales peuvent être, en premier lieu, plus rapides, du fait qu'il est possible de concevoir les expériences de manière à obtenir des preuves documentaires sur une base ex ante. Cet avantage se concrétise particulièrement lorsqu'il n'existe pas de données d'archives pertinentes disponibles et (ou) aucun proche substitut de données historiques relativement à une norme comptable proposée. En deuxième lieu, les méthodes expérimentales peuvent être plus englobantes. Elles permettent parfois de vérifier un éventail de solutions, en ce qui a trait aux normes, que la méthode des données d'archives ne permet pas de vérifier en raison de l'insuffisance des données disponibles. En dernier lieu, les méthodes expérimentales permettent d'isoler et de mesurer clairement l'orientation et l'intensité des relations de cause à effet. Dans leurs décisions, les responsables de la normalisation doivent disposer de renseignements sur la nature et la cause des conséquences prévues et imprévues des normes proposées et déjà promulguées. C'est pourquoi la documentation relative à la causalité est d'un apport déterminant et précieux dans leurs délibérations.

This paper examines daily excess bond returns associated with announcements of additions to Standard and Poor's Credit Watch List, and to rating changes by Moody's and Standard and Poor's. Reliably nonzero average excess bond returns are observed for additions to Standard and Poor's Credit Watch List when an expectations model is used to classify additions as either expected or unexpected. Bond price effects are also observed for actual downgrade and upgrade announcements by rating agencies. Excluding announcements with concurrent disclosures weakens the results for downgrades, but not upgrades. The stock price effects of rating agency announcements are also examined and contrasted with the bond price effects.

This paper examines the bond and stock price reactions to the announcement of insubstance defeasances, and the motivations for the transaction. We find a reliably positive bond price reaction and a reliably negative stock price reaction. However, the bond price reaction is much less than would be predicted had the defeased bonds been made riskless. We find evidence suggesting that some firms defease to window-dress their earnings, some defease to avoid restrictions in bond covenants, and some defease as a use for excess cash on hand.

We document that an SEC investigation of an underwriter imposes indirect penalties on the underwriter and its past clients, particularly IPO clients. Targeted underwriters experience large declines in IPO market share and increased regulatory scrutiny and client risk after an SEC investigation is announced. Stock prices of clients decline significantly. We attribute these effects to a sudden deterioration in the value of the underwriter's reputation capital, suggesting that the general assumption in prior IPO research that underwriter reputation is stationary may be inappropriate. Our results also suggest that the SEC's power to institute investigations should be considered when designing optimal securities regulation.