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The Accounting Review Vol. 64 No. 4 1989

Did Firms Undertake Debt-Equity Swaps for an Accounting Paper Profit or True Financial Gain?

John R. M. Hand

Assistant Professor of Accounting, Graduate School of Business, University of Chicago. 1

Abstract

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.

DOI
10.2308/tar-4478010
Volume
64
Issue
4
Pages
587-623
Language
en
Sources
crossref openalex

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