SELECTED ANNOTATED BIBLIOGRAPHIES

This is a sample of the bibliographies taken from the papers, which have been written and discussed during the second half of the course.

AUTHOR: Ellig, Bruce R.

TITLE: Employee Stock Options: An Overview

CITATION: American Compensation Association Journal, Spring 1998 p8-12(5)

ABSTRACT: Mr. Ellig gives an overview of employee stock options, including typical eligibility, frequency, exercise period, and calculation of award sizes. He also defines what an option is and the various forms they can take. Tax treatment from the employee and employer perspective is also discussed.

AUTHOR: Rouse, Robert W Barton, Douglas N

TITLE: Stock compensation accounting

CITATION: Journal of Accountancy. v175n6. Jun 1993. p. 67-70, 4 pages.

ABSTRACT: Accounting for employee stock options might be today's most controversial accounting issue. Over 90% of US public corporations offer stock options to top executives. Companies are concerned that changes in stock option accounting could affect net income adversely, making options less attractive as employee incentives. Some argue that the granting of stock options should be reflected in a company's income statement. The debate over accounting for stock options centers on 3 key questions: 1. Should granting stock options result in expense recognition? 2. If so, how should the expense be recognized? 3. When should it be measured? An important concern in stock option accounting is the difficulty of valuing employee options. The FASB must decide whether option pricing models can estimate the fair value of employee stock options at a reasonable cost and with a reasonable degree of reliability. An exposure draft may be issued by the Financial Accounting Standards Board (FASB) in the first half of 1993 concerning stock option accounting.

AUTHOR: Sloan, Allan

TITLE: Games with numbers 101: wherein mighty Microsoft enriches its employees - without hurting its earnings.

CITATION: Newsweek, Oct 21, 1996 v128 n17 p48(1)

ABSTRACT: Microsoft gives most of its employees stock options, which enables it to have better earnings and a higher stock price. Options motivate employees to perform better and do not have to be reported as corporate income. NOTE: Steele & Tanis will update/provide class with Microsoft's 1997 fiscal year-end financial results.

AUTHOR: Mellman, Martin Lilien, Steven

TITLE: Stock-based compensation effect on net income

ABSTRACT: SFAS 123, Accounting for Stock-Based Compensation, encourages companies to account for stock compensation awards based on their estimated fair value at the time of grant. Companies can continue to account for stock options under the rules of APB Opinion 25, which does not require recognition of compensation for most option plans. Companies that choose to continue to follow existing standards are required to disclose in a note the effect on net income and earnings per share had the company recognized expense for stock compensation awards based on the new statement. To assess the potential impact on net income of the unrecognized expense in stock-based compensation plans, proxy disclosures were used as a basis. Three industries were studied: pharmaceuticals, biotechnology, and computers. The results suggest that many firms will opt for the disclosure alternative. The study shows the initial adoption impacts can, in fact, be quite dramatic.

AUTHOR: Aboody, David

TITLE: Market valuation of employee stock options

CITATION: Journal of Accounting & Economics. v22n1-3. Aug-Dec 1996. p. 357-391, 35 pages.

ABSTRACT: A study investigates whether investors incorporate the value of a firm's outstanding employee stock options into its stock price. The outstanding options' value is estimated for a sample of firms for which outstanding fixed options exceed 5% of outstanding common shares in 1988. A negative correlation is found between the value of outstanding options and a firm's share price. The correlation is stronger: 1. for the option's intrinsic value than for the option's time value, 2. for options that are later in their vesting stage than earlier in their vesting stage, and 3. for large firms than for small firms. In addition, the FASB's method for calculating compensation expense has no explanatory power in the presence of this calculation of the options' value.

AUTHOR: Wilson, Arlette C Weld, Len

TITLE: Proposed accounting for fixed stock options: Financial statement impact

CITATION: National Public Accountant. v40n6. Jun 1995. p. 25-28, 4 pages.

ABSTRACT: In June 1993, the FASB issued an Exposure Draft, "Accounting for Stock-based Compensation," which has stirred more controversy than any change the FASB has made to date. The major differences in accounting for fixed stock options that exist in the current and proposed standards are examined, and the impact of these differences on the financial statement and related calculations are discussed. The exposure draft would require companies to charge against earnings a value of fixed stock options as determined by an option-pricing model If this proposal is adopted, it could have a significant impact on reported net income for many companies, especially high-tech and startup companies, since they often rely on fixed options to attract otherwise unaffordable talented executives. This recognition of compensation expense will not only result in a lower net income but will also impact EPS and ROI with a double hit effect.

AUTHOR: Dakdduk, Kenneth E

TITLE: New FASB rules on accounting for stock-based compensation

CITATION: CPA Journal. v66n3. Mar 1996. p. 14-19, 6 pages.

ABSTRACT: In October 1995, the FASB issued SFAS 123, Accounting for Stock-Based Compensation, which established new fair value-based accounting and reporting standards for all transactions in which a company acquires goods and services by issuing its equity instruments or by incurring a liability to its suppliers in amounts based on the price of its common stock or other equity instruments. If the awards are to employees, companies must decide whether to adopt the new accounting rules and recognize an expense in the income statement, or remain on APB Opinion 25, Accounting for Stock Issued to Employees, and disclose in the notes to financial statements the required pro forma information. In most cases, that decision will depend on the impact SFAS 123 would have on net income from period to period. The new rules will generally result in lower net income and earnings per share than under Opinion 25. Companies should begin now to understand the new rules and evaluate the financial statement implications.

AUTHOR: Steinberg, Joel

TITLE: Stock-based compensation issues

CITATION: CPA Journal. v68n3. Mar 1998. p. 52-53, 2 pages.

ABSTRACT: SFAS 123, Accounting for Stock-Based Compensation, provides a choice between 2 acceptable accounting methods for measuring compensation cost in transactions with employees. Companies can measure compensation cost using the intrinsic value model prescribed in APB 25, or can measure compensation cost using the fair value model described in SFAS 123. The appropriate treatment can vary depending on the facts and circumstances surrounding each transaction.

AUTHOR: Newell, Gale E Kreuze, Jerry G

TITLE: Stock-based compensation: A cost-effective means of compensating employees ... or an accounting illusion?

CITATION: Employee Benefits Journal. v22n3. Sep 1997. p. 12-16, 5 pages.

ABSTRACT: The issuance of SFAS 123, Accounting for Stock-Based Compensation, provided what appeared to be a conclusion to the controversy surrounding stock option accounting. Although the FASB encourages fair value accounting for stock-based compensation, not all companies have implemented the Board's recommendation and instead treat stock options as costing virtually nothing. However, cash options can have significant cash outflows. Accordingly, any stock option plan should observe the fine line between protecting the interests of stockholders and providing executives with the necessary incentives to maximize the company's worth.

AUTHOR: Fox, Justin

TITLE: The next best thing to free money

CITATION: Fortune. v136n1. Jul 7, 1997. p. 52-62, 8 pages.

ABSTRACT: There is more to the options culture of Silicon Valley than just a few lucky kids striking it rich. Silicon Valley would not be what it is today without stock options - nor, arguably, would the US stock market be as supercharged or the economy be buzzing along as smoothly. They give established companies a tool to motivate employees. They give businesses with already soaring stock prices and extra boost to earnings because of how options are treated on financial statements. A uniquely American phenomenon, the options culture explains why more than 400 public companies have sprung up in Silicon Valley, and why another 148 there got venture-capital backing in the first quarter of 1997 alone. Part of the credit for the success of stock options goes to the hugely successful high tech companies that went public in 1986, including Oracle, Sun Microsystems, Silicon Graphics, Adobe Systems, Informix, and Microsoft.

AUTHOR: Coller, Maribeth Higgs, Julia L

TITLE: Firm valuation and accounting for employee stock options

CITATION: Financial Analysts Journal. v53n1. Jan/Feb 1997. p. 26-34, 9 pages.

ABSTRACT: In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, which changes the accounting treatment for employee stock options. For some firms, the new method may significantly affect the bottom line. Although seeking to require better recognition of an important item, the new standard also leaves much room for individual judgment in determining the amount of that item. The new standard is applied to 6 publicly traded corporations, and it is demonstrated that, in some cases, significant differences in valuation may result when different, yet equally acceptable, calculation methods are used. As a result, financial statements of firms using the new standard should be interpreted with caution.

AUTHOR: Freeman, Gary R Larsen, Glen A Jr

TITLE: The market's reaction to the FASB stock-based compensation project

CITATION: Journal of Applied Business Research. v13n4. Fall 1997. p. 83-91, 9 pages.

ABSTRACT: Stock-based compensation plans are often used by companies as a method of providing incentive compensation to top executives. A study investigates the market response to the announcement and subsequent withdrawal of the FASB stock-based compensation project. The findings suggest that investors expected the reduction in uncertainty resulting from expensing stock option costs to enhance firm value and were disappointed when the FASB withdrew the project.

AUTHOR: Perlmuth, Lyn

TITLE: Hanging tough on stock options

CITATION: Institutional Investor. v28n11. Nov 1994. p. 172, 1 pages.

ABSTRACT: The Financial Accounting Standards Board's (FASB) proposal to require companies to deduct from their earnings the value of stock options granted to employees is drawing an increasing amount of criticism. Opponents of the rule argue that small companies and their workers will be irremediably hurt. The proposal's proponents counter that the brunt of the impact will be borne by top executives, who can absorb it. The FASB's own field test of the standard, conducted in late 1993 with 25 companies ranging widely in size, showed that it would have had a negative effect on each one's profit and loss statement in past years. But the effect generally was worse for the smaller companies, because they had granted options to a greater proportion of their employees than had the larger operations.

AUTHOR: Foster, Taylor W., III Koogler, Paul R. Vickrey, Don

TITLE: Valuation of Executive Stock Options and the FASB Proposal

CITATION: Accounting Review. v66n3. Jul 1991. p. 595-610, 16 pages.

ABSTRACT: The Financial Accounting Standards Board (FASB) is considering a proposal to measure compensation related to grants of employee stock options (ESO) at their fair values, with a lower bound constraint. The FASB's proposal may be seen as the continuation-dividend version of the Black-Scholes (1973) pricing model. The FASB's proposal is applied to a random sample of firms that granted stock options to assess the impact of the related compensation expense on operating income. The results indicate that, using a 3% materiality threshold, about 30% of non-dividend paying firms would have material income effects, compared to about 8% for dividend paying firms. Using alternative measures of service periods shorter than the lives of options produces material ESO compensation expense for a high percentage of sample firms. Applying the FASB proposal on the basis of the vesting date would result in a lower income effect than applying it on the basis of the date of grant.

AUTHOR: Lowengard, Mary.

TITLE: Dilutions of grandeur.

CITATION: Institutional Investor. v32n1. Jan 1998. p. 34, 1 page.

ABSTRACT: Investors may remember December 15, 1997, as D-day - D for disclosure, or possibly for dilution - thanks to a new Financial Accounting Standards Board edict that went into effect that day. Two new rules, FAS No. 128, affecting how earnings per share is computed and disclosed, and FAS No. 131, reorganizing segment reporting - will keep investor relations officers on their toes.

AUTHOR: Law, David B Meeting, David T.

TITLE: EPS--computational wrinkles and contingent shares.

CITATION: CPA Journal. v68n1. Jan 1998. p. 52-53, 2 pages.

ABSTRACT: In February 1997, the FASB issued SFAS 128, Earnings per Share, which supersedes APBO 15, Earnings per Share. The new statement reaffirms portions of APBO 15 and consolidates portions of the superseded AICPA Interpretations 1 to 102 and FASB Interpretation 31 dealing with lesser-known computational wrinkles. The statement was issued concurrently with a standard with the same name issued by the IASC. An article focuses on certain computational wrinkles in the new statement, as well as the effect of contingent shares. Convertible securities, fixed stock awards and noninvested stock, and stock repurchases are discussed.

AUTHOR: Elsea, John E Cox, Bill D.

TITLE: The FASB's new earnings per share standard: Simplifying the computation.

CITATION: CPA Journal. v67n8. Aug 1997. p. 26-30, 5 pages.

ABSTRACT: In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, Earnings per Share, which contains new standards for determining and reporting earnings per share (EPS). These new standards are intended to simplify the current standards and make them comparable to international EPS standards. APB Opinion No. 15, Earnings per Share, issued in 1969, was the 1st official accounting pronouncement to require presentation of EPS figures in the income statement and provide information on how to compute EPS. This opinion, which guides current practice, proved to be so complex and controversial that, by 1971, the AICPA had published 102 accounting interpretations related to it. SFAS No. 128 will replace "primary EPS" with "basic EPS," which will be calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. As a result of the elimination of primary EPS, several tests for common stock equivalency are also eliminated.

AUTHOR: Anonymous

TITLE: Statement of Financial Accounting Standards Board No. 128--Earnings per Share.

CITATION: Journal of Accountancy. v184n2. Aug 1997. p. 100-104, 5 pages.

ABSTRACT: Statement of Financial Accounting Standards Board No. 128, Earnings per Share, establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. The text of the official release of SFAS 128 is presented.

AUTHOR: Jennings, Ross LeClere, Marc J Thompson, Robert B II.

TITLE: Evidence on the usefulness of alternative earnings per share measures.

CITATION: Financial Analysts Journal. v53n6. Nov/Dec 1997. p. 24-33, 10 pages.

ABSTRACT: In February 1997, the Financial Accounting Standards Board adopted new reporting rules for earnings per share (EPS) - SFAS No. 128, Earnings per Share. The new standard replaces "primary" EPS with "basic" EPS and makes a minor adjustment in the computation of "fully diluted" EPS. A comparison of the extent to which basic, primary, and fully diluted EPS explain variation in stock prices for a large sample of NYSE-and Amex-listed firms from 1989 to 1995 suggests that and investors are likely to be no worse off under the new standard than under the old and may, in fact, have access to better information under the new standard because of its enhanced disclosure requirements.

AUTHOR: Thompson, James H.

TITLE: A new EPS: Seeking greater international comparability of accounting standards.

CITATION: National Public Accountant. v42n9. Nov 1997. p. 33,36+, 6 pages.

ABSTRACT: The Financial Accounting Standards Board (FASB) has issued FASB Statement No. 128 (FAS 128) which specifies the computation, presentation and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock or potential common stock. FAS 128's objective is to simplify the of earnings per share and to make the US standards more compatible with the EPS standards of other countries and with that of the International Accounting Standards Committee (IASC). Issues concerning FAS 128 include: 1. the work of the IASC, 2. the work of the FASB, 3. EPS representation under FAS 128, 3. basic EPS and diluted EPS, 4. computational issues, 5. treatment of options and warrants, 6. treatment of convertible securities, 7. treatment of contingently issuable shares, 8. presentation on the front of the income statement, 9.disclosure requirements, and 10. effective date and transition.

AUTHOR: Michael G. Stevens.

TITLE: The new prominence of comprehensive income. (Financial Accounting Standards Board's new standards on comprehensive income reporting).

CITATION: The Practical Accountant, Sep 1997 v30 n9 p59(4).

ABSTRACT: The Financial Accounting Standards Board (FASB) as issued a new standard on the reporting and display of comprehensive income. The standard will take effect after Dec 15, 1997 and requires entities to classify items of 'other comprehensive income' by their nature in financial statements while the accumulated balance of the income should be displayed separately from retained earnings in the equity section of statements.

AUTHOR: Gary J. Brauchle; Cheri L. Reither.

TITLE: SFAS No. 130: Reporting Comprehensive Income.

CITATION: The CPA Journal, Oct 1997 v67 n10 p42(5).

ABSTRACT: The FASB's new accounting standard, SFAS No 130 (Reporting Comprehensive Income), mandates business organizations to submit a full set of requirements that include a report of their comprehensive income and its components. The Board defined comprehensive income as the change in a company's equity or net assets during a period resulting from transactions and other circumstances and developments from sources other than the business owner. SFAS No 130 provides guidelines on the reporting formats of comprehensive income and its components, the calculation and presentation of reclassification adjustments, the reporting of the accumulated balance of other comprehensive income equity, and interim period reporting. The new standards take effect for fiscal years that start after Dec 15, 1997.

AUTHOR: Michael H. Martin.

TITLE: How to compare earnings per share.

CITATION: Fortune, Feb 16, 1998 v137 n3 p183(1)

ABSTRACT: An accounting rule that took effect in December was designed to make companies come clean about the effect of employee stock options and earnings per share. But the change also complicated the task of making apples-to-apples comparisons among earnings numbers.

AUTHOR: Robert Bloom; William J. Cenker.

TITLE: SFAS No. 128: a first look at the new EPS standard. (Statement of Financial Accounting Standards 128 'Earnings per Share').

CITATION: The Ohio CPA Journal, July-Sep 1997 v56 n3 p33(3).

ABSTRACT: The Financial Accounting Standards Board issued Statement of Financial Standards No. 128, Earnings per Share (SFAS 128) in February, 1997. This 104 page document supersedes APB Opinion No. 15. Although much of the underlying theory of APB 15 has been retained, there are significant differences in the new statement. These differences primarily concern the calculation and presentation of EPS. This article summarizes the major requirements of the new standard by contrasting it with existing GAAP.

AUTHOR: Anonymous.

TITLE: New Reporting Numbers are now Due.

CITATION: Investor Relations Business, by Securities Data Pub., p. 1,12 -13.

ABSTRACT: Basic and Primary EPS and Comprehensive Income Must Now be Reported. Two new required calculations: earnings per share numbers and new compressive income numbers. Both requirements come form FASB, and the effective date for both was Dec 15, 1997.

AUTHOR: Pat McConnell, Janet Pegg, David Zion.

TITLE: Don't be Diluted, it's the Diluted that Matters.

CITATION: Accounting Issues, by Bear Stearns.

ABSTRACT: Effective for periods ending after December 15, 1997, companies are required to present two earning per share statistics: basic and diluted. Management of some companies take a position the FASB #128, does not address which EPS statistic needs to be discussed in the text of an earnings release. Therefore, they are focusing the discussion in their release on basic EPS. Since SEC has little jurisdiction over press releases, it is up to the financial community, analysts, portfolio mangers and the press, to insist that companies prominently discuss diluted EPS when releasing earnings.

AUTHOR: Pat McConnell, Janet Pegg, David Zion.

TITLE: A Common Denominator.

CITATION: Accounting Issues, Bear Stearns, April 1997,

ABSTRACT: Both the FASB and IASC recently issued new standards for computing earnings per share. The new calculation will appear in financial statements for periods ending after December 15, 1997. All prior-period EPS data presented (including 1997 quarterly EPS) must be restated.

AUTHORS: Kalagnanam, Suresh. Schmidt, Suzanne K.

TITLE: Analyzing capital investments in new products (biotechnology industry).

SOURCE: Management Accounting (New York, N.Y.). v. 77, Jan. 1996, p. 31-6.

ABSTRACT: A study was conducted to examine the experiences of a biotechnology company that placed increased emphasis on the financial performance of its new projects. As capital must be used wisely to generate sufficient returns, firms investing big sums of money in R&D are compelled to conduct rigorous a priori financial analyses to assess their new projects. Between February and October 1993, information was gathered through discussions and interviews with a number of employees in the marketing, R&D, and accounting departments and from documentary evidence. Findings are provided relating to the project development and evaluation process; the project selection criteria; the financial analysis; employees' problems with the new emphasis regarding cost accuracy, cost specification, timing, evaluation criteria, and behavioral implications; and the changes that have taken place since data collection was concluded.

AUTHORS: Kirsch, Robert J. Sakthivel, Sachi.

TITLE: Capitalize or expense? (software developed for internal use).

SOURCE: Management Accounting (New York, N.Y.). v. 74, Jan. 1993, p. 38-43.

ABSTRACT: Although no specific rules offer guidance on accounting for software developed for internal firm use, capitalization seems more appropriate than expensing these costs. The Institute of Management Accountants favors capitalization, but the FASB suggests that expensing these costs is not improper. Moreover, a survey of current practices at 139 Fortune 500 firms confirms that companies follow diverse practices in accounting for software developmental costs, with a majority of companies expensing systems and application software development costs. However, if software products provide future tangible benefits, they should be capitalized and classified as noncurrent assets in the balance sheet. This approach allocates all capitalizable costs to periods benefited and reduces periodic R&D expensing, which could encourage U.S. firms to engage in more software development.

AUTHORS: Sougiannis, Theodore.

TITLE: The accounting based valuation of corporate R&D.

SOURCE: Accounting Review. v. 69, Jan. 1994, p. 44-68.

ABSTRACT: A study set out to determine the productivity of corporate research and development (R&D) by examining its long-run effect on accounting earnings and the market value of equity. Cross-sectional data from the 1989 COMPUSTAT annual and research files were used to estimate two models for a sample of large U.S. corporations engaged in R&D: a model that determines R&D investment's impact on earnings, and a model that determines the impact of R&D investment on market values. Results from the earnings model indicate that a $1 increase in R&D spending leads to a $2 increase in profit over a period of seven years. The valuation model results indicate that a $1 increase in R&D spending yields a $5 increase in market value, indicating that investors place a high value on R&D investing. Additional findings are described.

AUTHORS: Chauvin, Keith W. Hirschey, Mark.

TITLE: Advertising, R&D expenditures and the market value of the firm.

SOURCE: Financial Management. v. 22, Winter 1993, p. 128-40.

ABSTRACT: A study examined whether investors recognize the long term, or asset-like, attributes of advertising and research and development expenditures. To provide an unbiased framework, the analysis considered the effects of advertising and R&D on the market value of common equity without any accounting-based adjustments. Data were obtained from cross-sectional samples of COMPUSTAT firms over the 1988-90 period; roughly 1,500 firms per year, on average, were considered. The results indicate that advertising and R&D expenditures have large, positive, and consistent influences on the market value of the firm. Like information on cash flow, data on these expenditures seem to help investors form appropriate expectations regarding the size and variability of future cash flows. As a result, spending on advertising and R&D can be viewed as a form of investment in intangible assets with predictably positive effects on future cash flows.

AUTHORS: Wolosky, Howard W.

TITLE: IRS eases position on R&D.

SOURCE: The Practical Accountant. v. 26, June 1993, p. 43-5.

ABSTRACT: New proposed regulations issued by the IRS under Sec. 174 should make it easier to claim deductions for research and development expenses. Sec. 174 gives taxpayers 2 alternative methods for accounting for R&D expenses: Deducting the expenses in the year in which they are paid or incurred, or treating them as deferred expenses, amortizable over a period of at least 5 years. Alternatively, a tax credit is available under Sec. 41 for incremental expenditures for qualified research. The credit is +currently available only for expenses paid or incurred before July 1992, but the proposed regs would permanently extend the credit. The Software Publishers Association believes that the new proposed regs are an improvement. Further details of the proposed regulations (PS-002-89) are explained.

AUTHORS: Erickson, Gary. Jacobson, Robertson.

TITLE: Gaining comparative advantage through discretionary expenditures: the returns

to R&D and advertising.

SOURCE: Management Science. v. 38, Sep. 1992, p. 1264-79.

ABSTRACT: A study investigated the extent to which R&D and advertising spending produce a comparative advantage enabling firms to earn above-normal profits. The stock market's reaction to discretionary expenditures was examined, first by not controlling and then by controlling for differences in firm profitability. Data on 99 firms that continually reported their advertising and R&D spending over the 1972-86 period were drawn from the 1986 Compustat database. Provision was made for unobserved firm-specific factors and for the influence of profitability on discretionary spending. The results point to substantially lower accounting and stock market returns to R&D and advertising than prior research suggests. Neither appears to increase a firm's market value more than do other types of spending. Obtaining a comparative advantage through any form of strategic action vitally depends on how the action meshes with the firm's asset and skill base so as to prevent imitation by competitors.

AUTHORS: Baber, William R. Fairfield, Patricia M. Haggard, James A.

TITLE: The effect of concern about reported income on discretionary spending decisions: the case of research and development.

SOURCE: Accounting Review. v. 66, Oct. 1991, p. 818-29.

ABSTRACT: A study examined whether concern about reporting favorable trends in accounting net income influences decisions to invest in research and development (R&D). The data consisted of information on 438 U.S. industrial firms that had R&D expenses greater than 1 percent of their sales during the period 1977-87, for a total of 4818 firm-year observations. The results indicate that relative R&D spending is significantly less when spending jeopardizes the ability to report positive or increasing income in the current period. Thus, it appears that decisions to invest in R&D are influenced by managers' concern about reporting earnings. This finding suggests that regulating accounting practices has direct and nontrivial economic consequences.

AUTHORS: Bruner, Richard.

TITLE: R&D debate--how to fund, where.

SOURCE: Electronic News (New York, N.Y.: 1991). v. 43, Sep. 1 1997, p. 1.

ABSTRACT: The debate over research activity and its funding is discussed. Two studies sponsored by the National Science Foundation indicate that university scientists have made a substantial contribution to industries' technology in more than 20 percent of incidences and that in the last five to ten years, there has been a huge increase in the number of times that patents cite scientific papers. However, Terry Heng, the vice president and director of external technology planning for Motorola, believes that such mature companies as Motorola become increasingly less dependent upon university-generated research, although start-up companies do tend to use a great deal of such research. Regardless of its ultimate uses, scientific research at universities is inclined to be funded by U.S. government departments and agencies, and those affected by such funding are paying close attention to the current budget legislation under congressional scrutiny. The views of both those who believe that the government should be involved in such funding and those who do not are presented.

AUTHORS: Haber, Carol.

TITLE: IP bond plan draws interest of high-tech (Fahnestock & Co.).

SOURCE: Electronic News (New York, N.Y.: 1991). v. 43, May 5 1997, p. 1.

ABSTRACT: New York-based Fahnestock & Co. is in discussions with "several" high-tech firms, including a major semiconductor firm and some smaller software and hardware firms, about the possibility of a bond issue based on future royalties and licensing fees from those firms' intellectual properties. Fahnestock is waving the possibility of "a bundle of cash up-front" from the fixed-income financing, which could fund R&D needs in a timely and potentially painless manner. Additionally notable is "a pop in earnings." Company executives are intrigued but cautious, according to Fahnestock investment banker Riaz Valani, who is spearheading the initiative after collaborating with managing director David Pullman. A comparably-based bond financing by Fahnestock raised $55 million for rock star David Bowie, with "Bowie bonds" supported by future royalties for the singer's recordings.

AUTHORS: Banks, Howard.

TITLE: Why R&D dollars are working smarter and harder.

SOURCE: Forbes. v. 156, Nov. 20 1995, p. 37.

ABSTRACT: Overall R&D spending for 1995 now looks healthy at an estimated at $169 billion, down--but not catastrophically so--from $177 billion in 1994. Moreover, companies are obtaining more productive results from the money they spend on R&D and the greatly rising use of computers and information technology in R&D makes the investment work harder and more efficiently. However, computers cannot ease the burden of government regulation for pharmaceutical companies: Getting a new drug approved today now costs well over $600 million; approval costs continue to run at their long-run average of over 13 percent a year, cutting the number of new drugs approved from 60 to 40 per year, and the number has recently been declining sharply.

AUTHOR: Solt, Michael E

TITLE: SWORD financing of innovation in the biotechnology Industry

SOURCE: Financial Management. v22n2. Summer 1993. p. 173-187, 15 pages.

ABSTRACT: A financing arrangement known as stock warrant offbalance-sheet research and development (SWORD) has been used in the biotechnology industry to finance innovation. Biotech firms are so small that they often cannot diversify innovation risk internally across projects, and conventional internal financing of innovation is generally not possible. Since a SWORD is offered to the investment public, the innovation risk can be diversified across many investors and their portfolios. It is shown that a SWORD can promote innovation in a manner not possible when more conventional financial management techniques are used because a SWORD structures the innovation as a real option. SWORD financing is likely to be successful in other situations, such as when product developement is technical in nature or obtaining financing is difficult because of the large risk of the product development or because of firm size.

AUTHOR: Szewczyk, Samuel H Tsetsekos, George P Zantout, Zaher

TITLE: The valuation of corporate R&D expenditures: Evidence from investment opportunities and free cash flow

SOURCE: Financial Management. v25n1. Spring 1996. p. 105-110, 6 pages.

ABSTRACT: The role of investment opportunities and free cash flow in explaining R&D-induced abnormal returns is examined. After controlling for firm size, financial leverage, dividend yield, ownership structure and structure, the research finds a significant positive relation between a firm's Tobin's q and its stock price reaction to announcements of increases in R&D expenditures. This result supports the investment opportunities hypothesis. A lack of support is found for the free cash flow hypothesis from a joint examination of Tobin's q and cash flow. It is also found that R&D-induced abnormal returns are positively related to the percentage increase in R&D spending, the firm's debt ratio and institutional ownership.

AUTHOR: Myers, Stewart C.

TITLE: Notes on an Expert System for Capital Budgeting

SOURCE: Financial Management. v17n3. Autumn 1988. p. 23-31, 9 pages.

ABSTRACT: An expert system for corporate capital investment decision making was designed by a venture capital-backed start-up company and released in 1986. The system was designed to recognize appropriate relationships, to carry out consistency checks, and to explain what it does. The system was taught to acquire information about the basic economics of the user's business and to feed that information back into the discounted cash flow (DCF) calculations. The system consists of 3 parts: input, valuation, and analysis. A composite expert system, it combines several artificial intelligence technologies, such as: 1. contingent inheritance hierarchies, 2. object-oriented programming, 3. production rules, 4. model-based reasoning, and 5. constraint-based inference. One of the most valuable parts of the system is the analysis of competitors' impact. There is a need for economic models and quantitative procedures that bridge the gap between managers' business knowledge and DCF calculations.

AUTHOR: Myers, Stewart C.

TITLE: The Capital Structure Puzzle

SOURCE: Journal of Finance. v39n3. Jul 1984. p. 575-592, 18 pages.

ABSTRACT: In investigating corporate finance behavior and how that behavior affects security returns, 2 approaches to understanding capital structure are evaluated with respect to 5 aspects of financing behavior: 1. internal versus external financing, 2. timing of security issues, 3. borrowing against intangibles and growth opportunities, 4. exchange offers, and 5. issue or repurchase of shares. A static trade-off framework is presented in which the firm is viewed as setting a target debt-to-value ratio and gradually moving toward it, in much the same way that a firm adjusts dividends to move toward a target payout ratio. In contrast, a pecking order approach is developed in which the firm prefers internal to external financing, and debt to equity if it issues securities. In the pure pecking model, the firm has no well-defined target debt-to-value ratio. A modified pecking order strategy, incorporating those elements of the static trade-off model which have clear empirical support, provides the better approach to understanding corporate financing behavior.

AUTHOR: Myers, Stewart C. Majluf, Nicholas S.

TITLE: Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have

SOURCE: Journal of Financial Economics. v13n2. Jun 1984. p. 187-221, 35 pages.

ABSTRACT: A firm is considered that has assets in place and a valuable real investment opportunity, the realization of which requires the issuance of common shares to raise the necessary cash. Under the assumptions that management knows more about the firm's value than potential investors and that investors interpret the firm's actions rationally, an equilibrium model of the issue-invest decision is developed. The model's most notable properties are: 1. It is generally better to issue safe securities than risky ones. 2. Firms whose investment opportunities outstrip operating cash flows, and that have exhausted their ability to issue low-risk debt, may forego good investments rather than issue risky securities to finance them. 3. Firms can accumulate financial slack by restricting dividends when investment requirements are modest. 4. The firm should not pay a dividend if it has to regain the cash by selling stock or some other risky security. 5. When managers have superior information and issue stock to finance investment, stock price will fall.

AUTHOR: Vicki Arnold

TITLE: Going concern evaluation: factors affecting decisions

CITATION: The CPA Journal, October 1993, p. 58

ABSTRACT: A case study involving an ambiguous going-concern situation was developed to examine the process employed by auditors when assessing the continuity of a firm. Responses were obtained from 202 professional auditors. Results show that the cue most used by the auditors in assessing the status of the company were substantial operation losses incurred in the current year, continuous availability of trade credit, potential litigation, possible loss of a major customer, potential patent sale and current ratio near the loan agreement limit. This finding suggests that auditors tend to be conservative in their work and primarily focus more on prospective conditions than past information. The results also show that several auditors who are presented with similar data focus on different issues and thus reach diverging judgements.

AUTHOR: Marshall Geiger

TITLE: Reporting on going concern before and after SAS No. 59

CITATION: The CPA Journal, August 1995, p. 52

ABSTRACT: Statement of Auditing Standards (SAS) No. 59 requires auditors to explicitly examine and report the chances of survival of the companies they audit as part of each and every audit. The standard was introduced in response to an ongoing call by investors and other users of financial statements for auditors to provide early warning signals to help them identify financially distressed companies. The standard superseded by SAS No. 59 only required auditors to provide a "subject to' qualified audit opinion if the continued viability of the company being audited was uncertain. A study was conducted to find out if the new auditing standard improved auditors' reporting actions. The findings reveal that only 40% of 50% of the firms audited before the adoption of SAS No. 59, had audit reports that included the 'subject to' audit opinion. In contrast, it was found that 62% of bankruptcies for the period studied were identified through SAS No. 59 audit reports.

AUTHOR: Kevin Chen

TITLE: Going concern opinions and the market's reaction to bankruptcy filings

CITATION: Accounting Review, January 1996, p. 117

ABSTRACT: The relationship between going concern opinions and the market's reaction to bankruptcy filings was examined. Data were drawn from a sample of 98 bankrupt firms from the 1980-1988 period. Results showed that firms that received going concern opinions had less negative excess returns in the period around the filing of bankruptcy than those that received unqualified opinions. These results were found even after controlling for the probability of bankruptcy, the market's reaction to news announcements made before bankruptcy and changes in stock price before the auditor's report is submitted. This finding is consistent with those of earlier studies, which found going concern opinions to be indicative of bankruptcy and bankruptcy resolution.

AUTHOR: Roger Mills

TITLE: What is the value of an audit report?

CITATION: Journal of General Management, Summer 1993, p. 33

ABSTRACT: The association between audit firms' reports and clients' business failure were studied. About 107 companies placed in receivership, creditor's voluntary liquidation or being compulsory wound up were matched with non-failed companies based on company size, turnover and financial status. Results showed that the time between data publication and failure was inversely proportional to the time to qualify for going concern. Also, the weaker financial position of a failing company makes it more likely to receive a going concern qualification. Auditor switching is also more probable for companies that receive a going concern qualification. However, it was found that failure does not necessarily follow a going concern qualification or a non-qualified report. Moreover, no relation with regard to qualification rate was found between larger and smaller audit firms.

AUTHOR: Jane Mutchler, William Hopwood, James McKeown

TITLE: The influence of contrary information and mitigating factors on audit opinion decisions on bankrupt companies \

CITATION: Journal of Accounting Research, Autumn 1997, p. 295

ABSTRACT: A study was conducted to examine the impact of contrary information and mitigating factors on audit opinion decisions regarding companies on the verge of bankruptcy. Contrary information is defined as information challenging the further existence of the client while mitigating factors serve to offset and therefore lessen the impact of contrary information. Findings revealed a significant correlation between the going-concern opinion decisions of auditors in the face of bankruptcy and the likelihood of bankruptcy as well as an audit-report lag variable. It was also revealed that the going-concern opinion is highly correlated with payment and covenant defaults but not with cured default. The opinion was also correlated with a bankruptcy lag variable and very negative news reports before the audit-report date. Lastly, corporate size was also found to affect auditors' opinions.

AUTHOR: David Gwilliam

TITLE: The auditor's on-going concern

CITATION: Accountancy, January 1993, , p.70

ABSTRACT: The Auditing Practices Board and the Cadbury Committee on Corporate Governance have both released drafts of proposals increasing the responsibility of auditors by compelling them to report going concern qualifications. Auditors will be expected to report a going concern status once they determine that a large proportion of the distribution of future cash flows is negative. The accuracy of such prediction of failure lies on the nature of the distribution and the point when it is decided that a high possibility of failure exists. However, small investors with undiversified portfolios who will be normally provided with such information may not be able to read and correctly interpret the report. Also, other SOURCEs of information on risks such as financial analysts are already available. Other problematic concerns include the predictive ability of going concern qualifications, costs, subjectivity and its effect on the image of a client.

AUTHOR: Gregory J. Eidleman

TITLE: Z scores - a guide to failure prediction

CITATION: The CPA Journal, February 1995, p. 52

ABSTRACT: The incidence of business failure in the US is increasing. Statistics show that more than 300 companies go out of business every week. The high rate of bankruptcy is attributed to the combined effect of fiercer competition in the marketplace and heavier debt burdens carried by companies. Matters grow even worse when these two factors are accompanied by an economic downturn. A company's chances of survival can be predicted with the use of financial-statement analysis. One of the most commonly used statistical ratio models for predicting business collapse is Altman's Z score. This model has proven to be a reliable tool for bankruptcy forecasting in a wide variety of contexts and markets. However, it should be noted that the Z score does not apply to every situation. It can only be used for forecasting if the company being analyzed can be compared to the database.

AUTHOR: Dean Wyman

TITLE: May I have my balance please? Allocation of payments in bankruptcy cases

CITATION: Commercial Law Journal, Summer 1995, p. 132

ABSTRACT: When a debtor files a petition under Chapter 11, it often owns assets which are the subject of security interests. The secured creditor usually will demand to receive payments from the debtor while the debtor is using assets which are the collateral of the creditor. Often a debtor in a Chapter 11 case is faced with the stark choice of capitulating to the demands of a secured or undersecured creditor for adequate protection payments or ceasing operations. But there is hope for the beleaguered debtor. It may have the right to direct the allocation of payments made to an undersecured creditor. The right is often overlooked in the frenzy of the initial activities in Chapter 11 reorganization. By directing payments, the debtor may enhance the recoveries available to unsecured creditors. Through monitoring the application of payments, the debtor is also given the opportunity to insure that the undersecured creditor does not use its internal accounting system to generate a windfall. At the same time, the debtor should scrutinize the shifting values of its assets. With these efforts, a debtor will be better able to protect the unsecured creditors and the estate.

AUTHOR: Martha Middleton

TITLE: Bankruptcy lawyers say something for everyone in the new Reform Act

CITATION: Commercial Law Bulletin, Nov/Dec 1994, p. 8

ABSTRACT: Practitioners say that the Bankruptcy Reform Act of 1994 brought about the most significant changes to the Bankruptcy Code since 1978. Bankruptcy and commercial lawyers generally seem satisfied with the law, or at least believe it will help streamline the bankruptcy system and bring more equality to the players. Among the most discussed provisions of the Act are those creating 2 new types of Chapter 11 debtors - a small business debtor, created in Reform Act Section 217, and the single asset real estate debtor, created in Section 218. Lawyers say one of the most expected changes made in the new Act is Section 202, clarifying that non-insider transferees should not be subject to the preference provisions of the Code beyond the 90-day statutory period.

AUTHOR: Sally Schultz

TITLE: Financial reporting for firms in Chapter 11 reorganization

CITATION: National Public Accountant, January 1995, p. 24

ABSTRACT: Financial reporting by entities during Chapter 11 proceedings and after emerging from the proceedings under a confirmed plan is addressed by AICPA Statement of Position 90-7 (SOP), Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. SOP 90-7 requires entities in Chapter 11 proceedings to distinguish between transactions and events associated with the reorganization and those attributed to the ongoing operations of the business. After emerging from Chapter 11, the appropriate reporting depends on the specifics of the plan adopted. In some cases, fresh start reporting is applied by valuing the new entity at reorganization value. Fresh start reporting is required when the reorganization value of the entity's assets is less than the sum of its postpetition liabilities and claims and the old shareholders lose control as a result of the reorganization. Entities that do not qualify for fresh reporting should state liabilities compromised by a confirmed plan at the present value of the amount to be paid, discounted at an appropriate current rate and report debt forgiveness as an extraordinary item.

AUTHOR: Hamid Tavakolian

TITLE: Bankruptcy: An emerging financial strategy

CITATION: Management Research News, 1994, p. 51

ABSTRACT: Historically, bankruptcy has been viewed as a sign of organizational and managerial failure. However, in recent years, these negative stigmas have been melting away as more companies file for bankruptcy. Bankruptcy is rapidly becoming accepted as a corporate turnaround strategy by businesses. As a result, managers of these companies are no longer perceived as business failures. Rather, they are regarded as shrewd, intelligent financial strategists who are managing their organizations in the most effective and feasible way possible by implementing the best tools legally available to them. The benefit of utilizing Chapter 11 is that it protects the business from its creditors until a rescue plan is hammered out. Critics argue that the revised Chapter 1l regulations can allow the reorganization to drag on too long, to cost too much, to inhibit fair competition, and to give management too much power.

AUTHOR: Patricia Rummer

TITLE: Filing Chapter 11: Buying time but at what price?

CITATION: Commercial Law Bulletin, Sep/Oct 1993, p. 15

ABSTRACT: Chapter 11's debtor-friendliness lends itself to many strategic uses. Evan Flaschen of Hebb & Gitlin points out that buying time is one of the primary motivations for filing Chapter 11; often there is a threat by a secured creditor or a judgment creditor to seize assets. Chapter 11 can also effectively neutralize the creditor who tries to dominate the debtor by being the lone holdout. The sway that Chapter 11 gives a debtor over leases and executory contracts translates into another tactical advantage. The chance to borrow fresh money is a big advantage, practitioners agree. Chapter 11 financing is becoming a popular staple among the offerings of many lenders. Perhaps the biggest drawback to Chapter 11 is the amount of control the debtor must surrender to the court in return for its protector. Debtors also have to fear getting stuck with a plan that leaves them in a very weak capital position. Also, the principals of many debtor companies do not realize that the privilege of being debtor-in-possession confers fiduciary responsibilities on them.

AUTHOR: Michael Minor/Karen Stevens-Minor

TITLE: Resuscitating the Comatose Firm: Changing Management Responsibilities Under Chapter 11

CITATION: SAM Advanced Management Journal, Spring 1992, p. 29

ABSTRACT: A corporation that files for Chapter 11 bankruptcy is usually laden with debt and starved for cash. A corporation's attempt to reorganization by filing for Chapter 11 bankruptcy creates an instantaneous change in the obligations of management. In return for the protection of Chapter 11, the corporation must sever its attachment to its shareholders and devote itself to its creditors. The new rule of conduct then becomes: All management decisions must be made for the benefit of the corporation's creditors and must meet the fiduciary duty standard of conduct. The power to oversee the decisions of officers and directors is held by the bankruptcy court. The general guidelines for court scrutiny of business decisions include: 1. Routine business decisions do not require prior approval of the court. 2. Non-routine transactions are not permitted without pre-approval. 3. Transactions in the gray area between ordinary and extraordinary may be subject to pre-approval.

AUTHOR: John Griffing/Langdon Cooper

TITLE: "Refinancing" business and investments with bankruptcy

CITATION: Management Accounting, February 1997, p. 52

ABSTRACT: Good tax planning for bankruptcy involves 3 levels of planning. The first centers on the type, amount and timing of the tax liability and includes planning for litigation of liabilities. The 2nd level focuses on alternative entities for income recognition, and the 3rd involves planning to minimize the debtor's liability for unpaid debts after the bankruptcy. The type of bankruptcy impacts the tax treatment of a transaction. Of the 5 types of bankruptcies defined by the Bankruptcy Code, Chapters 7, 11 and 13 are the most common for businesses and individuals. These 3 chapters of the Bankruptcy Code are discussed, along with an in-depth analysis of the 3 levels of bankruptcy tax planning.

TITLE: Pick a number, any number

AUTHOR: Condon, Bernard

CITATION: Forbes. v161n6. Mar 23, 1998. p. 124-128, 5

ABSTRACT: Write-offs can make a new management look good. For example, in 1994, the year after Lou Gerstner arrived with massive restructuring charges, IBM would have reported a loss of $19.72 a share if the charges had been expensed as incurred instead of taken all at once. The apparent turnaround did not really begin until the next year, and not in earnest until 1996.William Leach, an analyst at Donaldson, Lufkin &Jenrette states that the accounting has really gotten perverted - to the point where managers earn what they think they should earn. Some companies take enormous write-offs when business is going gangbusters. Despite its recent tightening of some accounting rules, the Financial Accounting Standards Board has left definitions of one-time and restructuring vague.

TITLE: Learn to play the earnings game (and Wall Street will love you)

AUTHOR: Fox, Justin

CITATION: Fortune. v135n6. Mar 31, 1997. p. 76-80, 5

ABSTRACT: For the 41st time in the 42 quarters since it went public, Microsoft Corp. reported earnings that met or beat Wall Street estimates. Starting with the unveiling of Windows 95 in August 1995, Microsoft has followed a uniquely conservative method of accounting for the software it ships - deferring recognition of large chunks of revenue from a product until long after the product is sold. If not for this new accounting technique, the company would have had to report a sharp rising in profits in the latter half of 1995, then a sharp drop in the first half of 1996 - a turn of events that might have sent its stock price reeling - instead of the smoothly rising earnings that it posted. Another company that has used aggressive accounting to raise money is America Online (AOL). AOL's practice of capitalizing and writing off over 2 years the cost of free disks and ads it used to lure members was highly controversial and was abandoned in October 1996. Still, for years, it allowed the company to post earnings most of the time instead of losses, which helped it to raise more than $350 million on the stock market.

TITLE: Perceptions of earnings quality: What managers need to know

AUTHOR: Ayres, Frances L

CITATION: Management Accounting. v75n9. Mar 1994. p. 27-29, 3 pages.

ABSTRACT: The term "earnings quality" has been defined in various ways. One view relates to the overall permanence of earnings and another relates to earnings and stock market performance. Being aware of a number of factors related to perceived earnings quality can be important to a manager faced with choices that affect the bottom line. Managers need to consider the trade-off between improvement in reported earnings and a possible negative perception of earnings quality if the improvement in earnings is perceived to result in lower-quality earnings. Factors that can influence investors' perceptions of earnings quality include income smoothing and earnings management. There are 3 methods of earnings management: 1. Accrual management, 2. adoption of mandatory accounting policies, and 3. voluntary accounting changes. The favorable bottom-line earnings effect may appear to be a good reason to smooth or manage earnings. However, by acting to smooth earnings, the manager may create a new problem - investors' impressions that earnings have been manipulated.

TITLE: Stock Price Informativeness of Accounting Numbers: Evidence on Earnings, Book Values, and Their Components

AUTHOR: Wild, John J.

CITATION: Journal of Accounting & Public Policy. v11n2. Summer 1992. p. 119-154, 36 pages.

ABSTRACT: The increases in the amount and complexity of data in financial reports have yielded the assertion that these disaggregate disclosures are of minimal value to external users. Using a sample of over 500 randomly selected firm-year observations and more than 10 different earnings and book value components, the validity of this hypothesis is examined. Specifically, the components of earnings and book value are examined on the basis of whether they convey information relevant for the valuation of companies. The results show that these data convey value-relevant information; also, there is evidence that the informativeness of these data differs across industries and company size. The evidence is not consistent with the proposed summary report format, which might exclude these data because they are allegedly not beneficial to shareholders. Therefore, the accounting regulatory agencies should seriously question, if not resist, any proposed reduction in companies' financial reporting disclosure requirements.

TITLE: Accounting methods and differential stock market response to the announcement of earnings; Professional adaptation

AUTHOR: Pincus, Morton

CITATION: Journal of Accounting, Auditing & Finance. v8n3. Summer 1993. p. 221-248, 28 pages.

ABSTRACT: A study with the objective of assessing the extent to which previously documented cross-sectional differences in stock market responses to earnings announcements are associated with firms' in-place voluntary accounting method choices is presented. The possibility that managers may manage reported earnings via the choice of accounting policies provides a motivation for the study. Some conjectures about differences in "noise" in earnings signals generated under alternative accounting methods are developed and tested by estimating firm-specific earnings response coefficients. Both individual method choices and accounting method portfolios are examined. Overall there is little empirical support for the proposition that voluntary accounting method choices have a pervasive first-order effect on stock market reactions to earnings announcements.

TITLE: New light on accrual, aggregation and allocation, using an axiomatic analysis of accounting numbers' fundamental and statistical character

AUTHOR: Gibbins, Michael Willett, Roger J

CITATION: Abacus. V33n2. Sep 1997, p. 137-167, 31 pages.

ABSTRACT: It is argued, with axiomatic analysis and examples, that accounting numbers are statistics having properties such as distribution and variance that affect their usefulness in general and that many be examined separately from any use. Such an examination is helpful partly because it then avoids confounding the understanding of accounting measures' technical nature with issues of disclosure choice and use. The necessary axiomatic framework is presented briefly to establish its perspective on measurement questions, then the value of the framework for examining vexing accounting issues is illustrated with examinations of accrual accounting and matching, cross-sectional and time-series allocation, and accounting-relevant market values.

TITLE: Earnings management to avoid earnings decreases and losses

AUTHOR:Burgstahler, David Dichev, Ilia

CITATION: Journal of Accounting & Economics. V24n1. Dec 1997. P. 99-126, 28 pages.

ABSTRACT: A paper provides evidence that firms manage reported earnings to avoid earnings decreases and losses. Specifically, in cross-sectional distributions of earnings changes and earnings, unusually low frequencies of small decreases in earnings and small losses are found, as well as unusually high frequencies of small increases in earnings and small positive income. Evidence is found that 2 components of earnings, cash flow from operations and changes in working capital, are used to achieve increases in earnings. Two theories, based on stakeholder use of information-processing heuristics and prospect theory, about the motivation for avoidance of earnings decreases and losses are presented.

TITLE: Smoothing income in anticipation of future earnings

AUTHOR: DeFond, Mark L Park, Chul W

CITATION: Journal of Accounting & Economics. v23n2. Jul 1997. p. 115-139, 25 pages.

ABSTRACT: Recent theory argues that concern about job security creates an incentive for managers to smooth earnings in consideration of both current and future relative performance. A study finds support for this theory. The evidence suggests that when current earnings are "poor" and expected future earnings are "good," managers "borrow" earnings from the future for use in the current period. Conversely, when current earnings are "good" and expected future earnings are "poor" managers "save" current earnings for possible use in the future. However, sensitivity analysis indicates that selection bias cannot be ruled out as a potential alternative explanation for the findings.

TITLE: On the Usefulness of Earnings and Earnings Research: Lessons and Directions from Two Decades of Empirical Research; Discussion

AUTHOR: Lev, Baruch Patell, James M.

CITATION: Journal of Accounting Research. v27(Supplement). 1989. p. 153-201, 49 pages.

ABSTRACT: The usefulness of earnings to investors is assessed and the assessment is used for a reexamination of the accounting research agenda in this area. A major finding was that the correlation between earnings and stock returns is very low and sometimes negligible. The nature of the returns-earnings relation exhibits considerable instability over time. This suggests that the usefulness of quarterly and annual earnings to investors is very limited. Theoretical and methodological refinements aimed at improving the specifications of the returns-earnings relation have yielded very modest results toward furthering understanding of the usefulness of earnings to investors and policymakers. In a discussion of the study, Patell labels Lev's evaluation scheme the Sufficient Statistic Criterion. A careful consideration of Lev's work reveals the complex manner in which measurement error, omitted variables, and flaws in the underlying theory are intertwined in accounting research.

TITLE: A market-based evaluation of discretionary accrual models

AUTHOR: Guay, Wayne R Kothari, S P Watts, Ross L

CITATION: Journal of Accounting Research. v34 (Studies on Recognition, Measurement, and Disclosure Issues. Supplement). 1996. p. 83-105, 23 pages.

ABSTRACT: In order to evaluate five discretionary-accrual models, a simple earnings model is specified, managerial discretion hypotheses are presented from existing literature, and efficient markets are assumed. The five discretionary accrual models are the same as those evaluated in Dechow, Sloan, and Sweeney (1995). Three managerial discretion hypotheses are specified. First, under the performance measure hypothesis, discretionary accruals help managers produce a reliable and more timely measure of firm performance than using non-discretionary accruals alone. Second, the opportunistic accrual management hypothesis is that discretionary accruals are employed to hide poor performance or postpone a portion of unusually good current earnings to future years. Finally, discretionary accruals are noise in earnings. This is the noise hypothesis. The joint hypotheses are made explicit and explicit predictions are generated about the relative variability of earnings components, the correlation between discretionary accruals and nondiscretionary earnings, and the relation between stock returns and earnings components.

TITLE: Repeated accounting write-offs and the information content of earnings

AUTHOR: Elliott, John A Hanna, J Douglas

CITATION: Journal of Accounting Research. v34 (Studies on Recognition, Measurement, and Disclosure Issues.. Supplement). 1996. p. 135-155, 21 pages.

ABSTRACT: The information content of earnings conditional on the presence of large nonrecurring or unusual charges is examined. The incremental information content of these special items is also investigated. Of particular interest is whether investors view earning differently after firms report large nonrecurring charges. Using quarterly Compustat data, firm-quarters are categorized according to the frequency with which firms report large special items during 1975-1994. The increasing frequency of reported special items, both positive and negative, during this period, is documented, noting that the increase in the frequency with which firms report negative special items (write-offs) is up to 3 times higher than the incidence of positive special items, and the divergence has increased. The analysis of the valuation implications of write-offs examines the weights that investors attach to the unexpected portions of earnings (before the impact of write-offs).

AUTHOR: Francis, Jennifer Hanna, J Douglas Vincent, Linda

TITLE: Causes and effects of discretionary asset write-offs

CITATION: Journal of Accounting Research. v34 (Studies on Recognition, Measurement, and Disclosure Issues.. Supplement). 1996. p. 117-134, 18 pages.

ABSTRACT: Evidence is provided on the causes and shareholder wealth effects of discretionary asset write-offs. The term "write-off" is used to refer to both complete and partial downward asset revaluations, and the sample write-offs are described as discretionary because over the 1989-1992 period covered by the study, there was little authoritative guidance on the accounting for most types of asset impairments, other than inventory. Evidence is provided on which of 2 factors, manipulation or impairment, drives write-off decisions and whether market reactions to write-offs depend on these factors. Stock price responses to write-off announcements are examined, both in aggregate and conditional on characteristics of the write-offs. The selection of the write-off and non-write-off samples is detailed and descriptive statistics are provided about the sample write-off announcements.

TITLE: Discussion: Write-offs: Manipulation or impairment?

AUTHOR: Wilson, G Peter

CITATION: Journal of Accounting Research. v34 (Studies on Recognition, Measurement, and Disclosure Issues.. Supplement). 1996. p. 171-177, 7 pages.

ABSTRACT: A discussion is presented of 3 papers which all make solid contributions to what potentially could be a fertile accounting literature. The papers are: 1. An Investigation of Asset Write-Downs and Concurrent Abnormal Accruals by Lynn Rees, Susan Gill and Richard Gore, 2. Repeated Accounting Write-Offs and the Information Content of Earnings by John A. Elliott and J. Douglas Hanna, and 3. Causes and Effects of Discretionary Asset Write-Offs by Jennifer Francis, J. Douglas Hanna, and Linda Vincent. It is argued that the authors focus far too much on the manipulation of the reported accounting numbers and far too little on the numbers' economic content.

AUTHOR: Byrd, John W., Sr.

TITLE: Investments -- Active vs. Passive: How to Determine the Approach to Take

CITATION: Pension World. v25n2. Feb 1989. p. 24,26, 2 pages.

ABSTRACT: An interesting evolution has occurred over the past 2 decades in the theory and methodology of managing pension and trust money. While there is a plentiful supply of new tools, a problem has developed that can cause individuals to lose the perspective necessary to have a plan operate in the best interest of its beneficiaries. Because of the dynamics of the financial marketplace today, a more fundamental view of the needs and requirements of a particular plan or fund may be warranted. Capital markets are influenced by several factors: 1. the emergence of a global economy and financial marketplace, 2. volatility, and 3. the fact that financial markets are adopting some of the characteristics of commodity markets. Fiduciary decision making needs to balance the "needs" with "wants." An active approach has several advantages, including a greater opportunity for growth in value over time. The passive management approach offers a different set of positive and negative factors, providing a high degree of certainty about preserving principal while experiencing minimal volatility.

AUTHOR: Halpern, Philip;Calkins, Nancy & Ruggels, Tom.

TITLE: Does the Emperor wear clothes or not? The final word (or almost) on the parable of investment management.

CITATION: Financial Analysts Journal, v52n4, Jul/Aug 1996, pp 9-15

ABSTRACT: In the story The Emperor's New Clothes, the tailor pretends to sew the Emperor a new wardrobe of luxurious clothes. Although the tailor expounds on the beauty and elegance of these clothes, the Emperor looks in the mirror and sees nothing on his body. After days of having the clothes properly fitted, the Emperor begins to believe they exist. In the end, the Emperor goes before the people in his new clothes and is embarrassed at believing in what is obviously not there. The questions are: 1. Have plan sponsors, like the Emperor, been tricked by the tailors of the investment management business into believing that active management adds value? 2. Can money managers be identified and hired that will consistently beat the market? Most studies seem to suggest that the answer to the first question is yes, and the answer to the 2nd question is no. Yet, whether driven by objective skepticism or personal interest, most investors seem to disagree with these answers.

AUTHOR: Garcia, C.B. & Gould, F.J.

TITLE: Some Observations on Active Manager Performance and Passive Indexing

CITATION: Financial Analysts Journal. v47n6. Nov/Dec 1991. pp. 11-13.

ABSTRACT: While data demonstrates that it is difficult for active managers to outperform the index a clear superiority of either active management or indexing remains undemonstrated. Many pension plan sponsors continue to do both. Indexing and active management are related in some ways that are not commonly perceived

AUTHOR: Jackson, Christoper D.

TITLE: The case for active versus passive equity investing.

CITATION: Trusts & Estates, 135n13, (12/96) p. 42

ABSTRACT: The recent bull market has skeptics of active U.S. equity money management touting the success of passive "index" investing. While this may be true over the short-term bull-market, time favors active management and its ability to take advantage of market inefficiencies. History has proven that talented active managers are able to provide returns in excess of index investing over extended market cycles. Because most successful strategies focus on longer-term market cycles, the proper use of active equity investing can ensure that investors meet their individual objectives

AUTHOR: Fulman, Ricki

TITLE: GE boosts active management

CITATION: Pensions & Investments. v26n6. Mar 23, 1998. p. 1, 55, 2 pages.

ABSTRACT: GE Investments' John W. Meyers has increased active domestic equity management and slashed the passive U.S. stock exposure of General Electric Co's $39 billion pension fund. Stock-picking is going to become more and more important in achieving performance, which is the reason for the shift. GE's defined benefit plan now has only 6% of its total equity component invested in domestic passive strategies, down from 15% last year.

AUTHOR: Guthrie, Jonathan

TITLE: A question of active versus passive portfolios.

CITATION: The Financial Times, May 9, 1997 ps4(1)

ABSTRACT: Index funds are becoming increasingly popular with U.S. and U.K. retail investors. At the same time, large pension funds' demand for passive management services has declined. At present, few members of U.K. company schemes have much investment choice, since most U.K. pension assets are held in final salary schemes. In such schemes, trustees determine the investment strategy and fund managers operate it. However, sales of index funds could rise as the group personal pension plan market grows.

AUTHOR: Cluck, D. Robinson.

TITLE: Active versus Passive: a matter of maeket efficiency.

CITATION: Trusts & Estates, 136nl (1/96) p.33.

ABSTRACT: The continued existence of anomalous stock pricing in securities markets calls into question the efficient market theory and suggests that active asset management can offer higher returns than passive strategies. In the 1950's and 1960's, researchers believed that stock prices would efficiently reflect value. Persistent anomalies such as earnings surprise and the January effect were discovered in the 1970's and 1980's. These anomalies suggest persistent investor and institutional biases that can be exploited through active investment strategies.

AUTHOR: Willoughby, Jack

TITLE: Has indexing grown unwieldy?

CITATION: Investment Dealers Digest. v62n18. Apr 29, 1996 p. 14-18, 5 pages.

ABSTRACT: Indexing - or so-called passive investment - and automatic savings programs like the ubiquitous 401(K) have virtually reshaped the dynamics of today's stock market. In indexing, an ever-increasing amount of money is being loaded on the back of a finite number of underlying stocks. The index funds create their own destiny by investing all of their cash in a small universe of companies, reducing the float. The smaller the float, the greater the price gyrations. However, great market swings create bad signals which could stampede the investment herd over a cliff. Despite its drawbacks and dangers, indexing is likely to keep growing until something causes it to stop. Vanguard Index Trust 500 Portfolio's net inflow of cash quadrupled between 1994 and 1995 - from $1 billion to $4 billion. In 1996, that pace has become dizzying - $2.3 billion in the first quarter.

AUTHOR: John Morrell

TITLE: Index obsession becomes investment havoc.

CITATION: Pensions & Investments, Sep 30, 1996 v24 n20 p52(1).

ABSTRACT: The key to good investment returns is predicating portfolio management on sound investment methodologies. A sound investment methodology uses strategy benchmarks that eliminate crossholdings, adjust for overvalued currencies and pegs equity prospects to the economic growth rate. Pension funds should ignore index performance as it is a passive discipline.

AUTHOR: Philip Coggan

TITLE: A dilemma for active managers.

CITATION: The Financial Times, Sep 1, 1997 p25(1).

ABSTRACT: Active fund managers have had difficulties in selecting domestic stock and some fund trustees may consider index tracking. Active managers tend to perform worse when there are distortions due to market euphoria, and this applies to 1982 to 1988 and 1994 onwards. Fund managers performed better from 1989 to 1993. A move to indexing could lead to underperformance because investors may be overweight in markets when they peakdue to investing in markets that have shown the greatest rises.

AUTHOR: Crerend, William

TITLE: Active vs. Passive Strategies Debated

CITATION: Pensions & Investments. V8n24, Nov. 24, 1980 p. 29-30.

ABSTRACT: A few years ago, a strong case was being made for passive or index fund investment. This was based on the argument that the Standard & Poor's (S & P) 500 Index had performed better than the great majority of investment managers. However, it is suggested that active management can co-exist with passive investment. Over the past 6 years, many money managers have managed to post better investment returns than indexed portfolios would have provided. This conclusion is based on a study of investment management organizations in Investment Manager Profiles. The study also indicates that the manager who outperformed the S & P 500 Index did so, for the most part, in all the cumulative periods of 6, 4, 3, and 2 years. This does not mean that passive investment has no place in a portfolio. It is also suggested that alternatives to the S & P 500 can provide unusual investment opportunities to the active manager.

AUTHOR: Sharpe, William F.

TITLE: The Arithmetic of Active Management

CITATION: Financial Analysts Journal. v47n1. Jan/Feb 1991. p. 7-9, 3 pages.

ABSTRACT: If active and passive management styles are defined in sensible ways, it must be the case that: 1. before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar, and 2. after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar. These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication, and division. Over any specified time period, the market return will be a weighted average of the returns on the securities within the market, using beginning market values as weights. An effective way to measure a manager's performance is to compare that individual's return with that of a comparable passive alternative, which should be feasible alternative identified in advance of the period over which performance is measured.

AUTHOR: Head, Wallace L

TITLE: Active portfolio management: Beating the tax bogey

CITATION: Trusts & Estates. v134n11. Nov 1995. p. 32-38, 5 pages.

ABSTRACT: Actively trading securities entails a bigger tax bite than buying and holding. In this regard, private investors and their advisors may be attracted to indexing - and in a similar vein, loath to sell a highly appreciated stock. However, just as the tax impact on returns should not be ignored, neither should it dictate strategy. At moderate turnover rates, clearing the tax hurdle should be well within a responsible money manager's capabilities. If the alternative is owning only a few stocks, diversifying and paying the tax can be prudent insurance against the concentration risk.

AUTHOR: Grace, Charles B

TITLE: Indexing produces mediocre long-term results

CITATION: Trusts & Estates. v135n8. Jul 1996. p. 10-14,

ABSTRACT: The behavior of actively managed portfolios indicates substantial value added by active management in excess of the indexes. Over 15 years, even the average large cap manager has outperformed the S&P 500 by about 0.7% per annum and the average of the top quintile added 2.9% in excess performance. The average small cap manager has generated very substantial excess returns of about 2.5% per annum above the Russell 2000. Both large cap and small cap managers add substantial value in sideways and in weak markets, but in very strong bull markets, even some of the top managers underperform. The overall performance of the managed large cap and small cap portfolios and the indexes since 1981 is presented.

AUTHOR: Maitland, Tracy V

TITLE: Convertible market shouldn't be overlooked

CITATION: Pensions & Investments. v24n19. Sep 16, 1996. p. 46- 47, 2 pages.

ABSTRACT: Today's concerns about a volatile stock market trading at historical highs have created an imperative to consider convertibles as a risk-averse alternative to common stocks. Convertibles provide superior risk- adjusted returns, allowing a portfolio manager to obtain equity-like returns with significantly less risk. Yet convertibles are overlooked by most investment professionals, and therefore are omitted from the asset-allocation process in many cases where they would be well-suited. The domestic convertible market has grown to approximately $115 billion. About half of the domestic convertible market is investment grade. The convertibles market provides many overlooked investment opportunities of the sort no longer available in more efficient markets. Convertibles are poised to continue to do well in the next 12 months. The average convertible yields 6.7%, or 450 basis points more than the 2.2% yield of the S&P 500. This yield advantage greatly enhances the total return from convertibles, and increases the odds convertibles will provide returns comparable to the returns from stocks, but at measurably lower risk.

AUTHOR: Sheets, Ken

TITLE: Income While you Wait

CITATION: Kiplinger's Personal Finance Magazine Nov, 1995. p. 107-109.

ABSTRACT: Convertible bonds pay bondlike interest while you wait to cash in on a rise in the price of the stock. Surely there's a catch to this idea. Convertible bonds can soothe the nerves of investors who are scared that the stock market is headed for a crisis but are equally afraid of missing out on big gains if they don't hang on for the ride. Carefully selected convertibles should capture 70%-80% of a stock's appreciation but suffer on 30%-40% of the losses.

AUTHOR: Wu, Jade

TITLE: Convertible Adventures

CITATION: Personal Investor. May, 1985. p. 47-50.

ABSTRACT: Convertible bonds are often overlooked by investors. But these instruments - which combine features of both bonds and stocks - can provide a smooth ride during bear markets, and a chance to profit when stock prices move higher. The price of a convertible debenture at any time is therefore a function of both bond prices and the price of the related stock. This article provides numerical example of the relation between the prices of bonds and stocks and there relationship on the convertible bond.

AUTHOR: Rue,Joseph and Stevens, William and Volkan, Ara

TITLE: Accounting for Convertible Bonds: An alternative Approach

CITATION: Journal of Applied Business Research. V12n2. Spring, 1996. p. 41-45.

ABSTRACT: Accounting for convertible bonds (CBs) has been a source of controversy for more than two decades. The main question relates to the nature of CBs. Should they be defined as: 1) debt; 2) equity; or 3) hybrid securities having both debt and equity characteristics? The disagreements revolve around the definition of several financial statement elements and fundamental concepts of accounting measurement. We believe that current procedures in accounting for CBs are flawed and alternative measures of reporting and recognizing CBs are required in order to provide useful information to external users of financial statements. After a review of alternative methods of accounting for CBs, we conclude that a CB is a partially executed contract which has equity characteristics. The purchaser has committed to buy stock at a fixed price in a future time period. The seller is committed to issue stock in the future and is committed to provide a cash dividend at a fixed rate (i.e. "interest") until the stock is issued The issuance allows the buyer to receive a return of the subscription price in the future if he fails to exercise his right or if the issue is called by the seller. Our approach of accounting for CBs emphasizes the economic reality of the situation rather than accounting by recording a liability which is replaced by equity when the issue is "converted "

AUTHOR: Rue,Joseph and Stevens, William and Volkan, Ara

TITLE: Accounting for Convertible Bonds: An alternative Approach

CITATION: Journal of Applied Business Research. V10n4. Fall, 1994. p. 130-141.

ABSTRACT: Accounting for convertible bonds (CBs), as promulgated by the Opinions of the Accounting Principles Board (APB) and Statements of Financial Accounting Standards (SFASs) of the Financial Accounting Standards Board (FASB), has been a SOURCE of controversy for more than two decades. The main question relates to the nature of CBs--are they; 1) debt; 2) equity; 3) hybrid securities having both debt and equity characteristics; or 4) securities that change from debt to equity when their common stock equivalent value exceeds their value as debt? These disagreements involve the definition of many of the financial statement elements and fundamental concepts of accounting measurement, recognition, and reporting promulgated by the FASB's Statement of Financial Accounting Concepts (SFAC) numbers 5 and 6. Thus, it is warranted to investigate whether current accounting procedures for CBs misclassify the original issue proceeds, understate borrowing costs, do not portray economic reality, and omit information from financial statements that can be important in evaluating managerial performance. The FASB had the opportunity to address these controversies when SFAS No. 84 was issued but chose not to do so (FASB 1985a, par. 21). The creation of new and more complex financial instruments to raise capital has made the resolution of the controversies urgent. Moreover, the issues debated have direct bearing on current FASB agenda items such as accounting for stock compensation plans and financial instruments, and distinguishing between liabilities and equities (FASB 1990).

AUTHOR: Dudley, Lola Woodard

TITLE: It's Time to Overhaul Accounting for Convertible Bonds

CITATION: Akron Business & Economic Review. v22n2. Summer 1991. p. 139-149, 11 pages.

ABSTRACT: The dual nature of convertible bonds as both debt and equity has long presented a challenge to the accounting profession. Although the Financial Accounting Standards Board (FASB) has included the problem of distinguishing between liability and equity characteristics of securities on its agenda, there is no indication that it intends to consider the entire structure of convertible bond reporting. To be worth the effort of compiling, analyzing, and reporting, accounting information must be beneficial to financial statement users; otherwise, any cost incurred in providing it is wasted. Considering the criticisms that are leveled against the FASB for requiring cost procedures that do not enhance the usefulness of financial statements, it cannot afford to ignore the problems inherent in convertible bond accounting any longer. The usefulness of the figures resulting from present procedures for accounting for convertible bonds is highly doubtful.

AUTHOR: Dudley, Lola Woodard Schadler, Frederick P

TITLE: Reporting the relative equity portion of convertible debt issues

CITATION: Journal of Accounting, Auditing & Finance. v9n3. Summer 1994. p. 561-577, 17 pages.

ABSTRACT: A study extends previous research on the valuation of the debt and equity components of convertible bonds. The results suggest a reliable method of segregating the 2 components of convertible debt that is superior to current practice as well as other suggested methods. The suggested classification technique offers 2 major advantages over current practice. First, at issue this method would identify the debt and warrant components of convertible bonds on the basis of market factors. Second, the method allows the relative debt and equity amounts to change as the underlying market pricing and trading characteristics of the issue change. This is superior to the all debt conversion approach followed in current practice. This method enables the issuing equity's financial statements to respond to changes in the underlying economic features of the issue, rather than ignoring those changes.

AUTHOR: Lummer, Scott L Riepe, Mark W

TITLE: Convertible bonds as an asset class: 1957-1992

CITATION: Journal of Fixed Income. v3n2. Sep 1993. p. 47-56, 10 pages.

ABSTRACT: A study examines the performance of convertible bonds and other asset classes for the period 1957-1992 and provides a rationale for holding convertible bonds. Since no single convertible bond index covers the entire period, 3 different indexes are combined to obtain the results. There are both qualitative and quantitative reasons to hold convertible bonds. They give the benefits of both a fixed-income and an equity investment, sell at attractive prices, and are ideally suited for investment in firms whose risk is difficult to assess. Over the last 20 years, convertibles have had slightly better return at substantially less risk than common stock.

AUTHOR: Ibbotson Associates, Goldman Sachs

TITLE: Investing in Convertibles as an Asset Class: 1957-1995

CITATION: Goldman Sachs Convertible Research, June 1997

ABSTRACT: Updates "NUMBER 8a" above through 1995

AUTHOR: Ibbotson Associates, Goldman Sachs

TITLE: Convertibles as an Asset Class - Update 2

CITATION: Goldman Sachs Convertible Research, April 1998

ABSTRACT: Updates "NUMBER 8b" above through 1997

AUTHOR: Sharpe, William F.

TITLE:Asset Allocation: Management Style and Performance Measurement

CITATION:The Journal of Portfolio Management, Winter 1992

ABSTRACT: It is widely agreed that asset allocation accounts for a large part of the variability in the return on a typical investor's portfolio. This is especially true if the portfolio is invested in multiple funds, each including a number of securities. Asset allocation is generally defined as the allocation of an investor's portfolio across a number of "major" asset classes. Clearly such a generalization cannot be made operational without defining such classes. Once a set of classes has been defined, it is important to determine the exposures of each component of an investor's overall portfolio to movement in their returns. Such information can be aggregated to determine the investor's overall effective asset mix, appropriate alterations can then be made. Once a procedure for measuring exposure to variations in returns of major asset classes is in place, it is possible to determine how effectively individual fund managers have performed their functions and the extent (if any) to which value has been added through active management. Finally, the effectiveness of the investor's overall asset allocation can be compared with that of one or more benchmark asset mixes. An effective way to accomplish all these tasks is to use an asset class factor model.

AUTHOR: Epstein, Gene

TITLE: Narrowing risk/reward

CITATION: Barron's. v75n46. Nov 13, 1995. p. 54, 1 pages.

ABSTRACT: A convertible bond is a debenture that is convertible into a specified number of shares of the issuing company's stock at a specified price. Because a convertible includes this option, it generally bears a lower interest rate than a comparable pure bond. Convertible bonds, in short, are Wall Street's version of a reversible jacket: On one side, the word "debt" appears; on the other side, "equity." They provide protection that can be comforting in volatile markets. Ibbotson Associates has found that converts have done better than straight bonds over the long haul. From July 1, 1976 to December 31, 1994, Ibbotson says, convertibles outpaced corporate, government, and municipal bonds. Typically, investors in these securities are seeking a narrower risk-reward ratio than they would get from investing directly in stock.

AUTHOR: Wirth, Gregg

TITLE: Converts become own asset class

CITATION: Investment Dealers Digest, v64n2, Jan 12, 1998 pp.32, 1pages, Headnote: The convertible market's second strong year of issuance dispelled many buyers' fears of a possible collapse of this market brought on by galloping redemptions. Instead the equity- linked instruments clinched their place as a distinct asset class. Convertible issuance worldwide, including public and Rule 144A placements, reached $49.7 billion on 327 deals last year. That mark matches 1996, when convertible issuance was $49.2 billion on 401 deals. Numbers aside, the year saw a general expansion in which convertibles evolved from a niche instrument to a widely accepted and sought-after security by investors across the globe.

AUTHOR: Thomas C. Noddings, Noddings Investment Group

CITATION: The Irwin Yearbook of Convertible Securities, Irwin Publishing, 1995

ABSTRACT: This reference book on convertible securities provides many graphs and tables illustrating the characteristics and composition of the convertible bond market which will be used in my discussion.

AUTHOR: Jalan, P Barone-Adesi, G

TITLE: Equity financing and corporate convertible bond policy

CITATION: Journal of Banking & Finance. v19n2. May 1995. p. 187-206, 20 pages.

ABSTRACT: A cooperative game playing model is used to examine ex ante the decision parameters that are involved in the selection of callable convertible bonds as a means of delayed equity financing. The differential tax treatment of coupon interest and dividend payments, coupled with market friction and incompleteness, provides sufficient reason for convertible debt issuance. Though there is a myopic incentive to expropriate wealth from convertible bondholders by inducing early conversion, value-maximizing managers choose to delay calling in order to maintain access to capital markets on favorable terms.

AUTHOR: Stein, Jeremy C.

TITLE: Convertible Bonds as Backdoor Equity Financing

CITATION: Journal of Financial Economics. v32n1. Aug 1992. p. 3-21, 19 pages.

ABSTRACT: Companies may find convertible bonds an attractive middle ground between the negative informational consequences associated with an equity issue and the potential for costly financial distress associated with a debt issue. When used as a call provision that enables early forced conversion, a convertible can serve as an indirect, albeit somewhat risky, mechanism for implementing equity financing that entails less of an adverse price impact than an offering of common stock. The theory that is developed has a number of empirical implications that appear to be supported by existing evidence. In particular, the theory fits well with the following facts: 1. A convertible issue typically leads to a less negative announcement effect than does an equity issue of comparable size. 2. Convertibles tend to be used predominantly by highly leveraged, highly volatile firms with large research and development portfolios and above average levels of intangible assets. 3. A majority of managers assert that their primary motive in using convertibles is to raise equity.

AUTHOR: Emery, Douglas R Iskandar-Datta, Mai E Rhim, Jong- Chul

TITLE: Capital structure management as a motivation for calling convertible debt

CITATION: Journal of Financial Research. v17n1. Spring 1994. p. 91-104, 14 pages.

ABSTRACT: Using a matched-pair methodology, a study presents empirical evidence of systematic changes within a corporation that are associated with calls of convertible debt. It is found that calling firms experience significantly greater growth than noncalling firms in the same industry, as measured by retained earnings and long-term debt. Also, the converted debt provides a significant SOURCE of new book equity, and calling firms issue significantly less other new equity. The pattern of growth in balance sheet accounts is consistent with the pecking order hypotheses and supports the notion that some firms call convertible debt to reduce their total cost of obtaining additional external financing. The evidence also shows that, on average, calling firms experience a significant decline in their leverage ratio based on book value but no significant change in their leverage ratio based on market value of equity. This is consistent with the calls being used as part of the firm's management of its capital structure.

AUTHOR: Retkwa, Rosalyn

TITLE: Building optimal capital structures that can support a tasty future

CITATION: Corporate Cashflow, v14n13, Dec 1993 pp.15-18, 4pages, Copyright Communication Channels Inc 1993

ABSTRACT: Confronted with low rates and a strong market for corporate securities of almost any type, financial chiefs are busy building the ideal capital structure, skillfully fitting together selected blocks of debt and equity. The perfect palace of capital is a mythical site, of course, but shrewd decisions now could pay off in a vital competitive edge for years to come. Some consensus seems to be emerging that the optimally leveraged company is likely to be among the single-A rated. Any more debt and a company is paying too much for capital and endangering its future access to the markets. Any less debt and shareholders might be penalized with a reduced return on equity. This article highlights examples of companies that have successfully used convertible debt to repair or build the organization's capital structure.

AUTHOR: Ibbotson Associates, Goldman Sachs

TITLE: Issuing Convertible Securities: An Issuer's Perspective

CITATION: Goldman Sachs Convertible Research, June 1997

ABSTRACT: Convertible securities are the most flexible financing instruments in the securities market and there are numerous factors driving the increasing popularity of convertible issuance around the world. We hightlight some of the most important points. 1) Lowering cash cost, 2) Potential deferred sale of equity in the future at a premium, 3) Tax-deductible interest 4) Rating agency considerations, 5) reduction of dilution, 6) Monetization of an equity investment, 7) Ease of Issuance, 8) Privatization, 9) Ability to finance in size, 10) Incremental investor demand, 11) Managing the issuer equity account, 12) Signaling.

AUTHOR: Horwood, Clive

TITLE: The early dawn of the euro market

CITATION: Euroweek. n541. Feb 27, 1998. p. E2-E22, 11 pages.

ABSTRACT: Can supply generate demand? The leading issuers and investment banks in the debt capital markets certainly hope so, as they seek to establish a foothold in Europe's future single currency market. Euro-denominated bond issuance is booming, as issuers seek to position their credits for the post-Emu world. Bankers are keen to show their euro credentials, as they try to get a headstart on their rivals and establish themselves as members of the euro bulge bracket club. Most deals have been well received. But will they meet the issuers' long term objectives? And are there sufficient investors ready to buy euro to support the expected steady stream of new issues? An article discusses these questions.

AUTHOR: Halls, Michael

TITLE: Ecu/euro: Glory days to come

CITATION: Euroweek. Review of the Year 1997 Supplement. Jan 1998. p. 124-128, 3 pages.

ABSTRACT: The ECU market made a dramatic return to form in 1997 after a period of decline throughout the early 1990s The return of institutional interest to the ECU/euro sector enabled a series of benchmark bonds to be launched. The EIB, Spain and Italy all took advantage of this trend to launch highly successful offerings.

AUTHOR: Anonymous

TITLE: The Medium-Term Euro-Credit Market in 1978-1981

CITATION: Financial Market Trends (France). n21. Mar 1982 p. 1-35, 35 pages.

ABSTRACT: Medium-term euro-credit forms have become increasingly diversified in recent years. The average annual amount of funds raised on international capital markets increased by nearly 170% between 1973-1977 and 1978-1981, largely due to the rapidly expanding volume of borrowing by way of US dollar-denominated credits; however, the market has remained largely tilted in favor of borrowers. During the period, there has also been a large increase in new commitments by banking institutions constituting a back-up to other means of largely non-bank financing. The dollar continued to dominate as a currency of denomination, accounting for about 95% of credits raised, although other national currencies and composite reserve units made gains. Borrowers from the Organization for Economic Cooperation & Development (OECD)-area increased their market share to 53% of the total, mainly at the expense of both Comecon- and Organization of Petroleum Exporting Countries (OPEC)-nations; there were also major shifts within those groups by type of borrower. Data on lead-management positions indicates that the market share of Middle East and other banks has increased, while the Germans withdrew and the US share remained fairly stable. Medium-term euro lending will probably receive increasing official prudential surveillance, but this in itself is unlikely to hamper activities of large international banks to any great extent.

AUTHOR: Cullinane, John Muir, Peter

TITLE: Tax and the euro

CITATION: Asset Finance International. n239. May 1997. p. 40, 1 pages.

ABSTRACT: The birth of the euro at the beginning of 1999 will change Europe's capital markets irrevocably. However, in the run-up the European monetary union, many of the tax issues arising from a unification of the currency will have to be addressed. Wherever opportunities exist, the market will identify them and use them for commercial advantage. Clearly major accounting/tax differences remain in the treatment of leasing. But there is the question of how long these differences will remain, given the market pressures to exploit them. It is likely that when monetary union is established it will eventually bring the regimes of EU member states closer together.

AUTHOR: Bainton, Lyndsey

TITLE: European Union

CITATION: International Tax Review. Capital Markets an International Guide to Tax Supplement. Jul/Aug 1997. p. 17-22, 6 pages.

ABSTRACT: The legal framework for the introduction of the Euro is contained in 2 proposed European Council regulations. The most notable feature of the Council Regulations from a tax perspective is the absence of provisions dealing with or referring to tax. Both the Commission and interested bodies in the UK have established working parties to examine the accounting and taxation implications associated with the introduction of the Euro and to determine how best to resolve any difficulties which are identified. The Commission's view is that tax is a matter for individual member states and an area in which it cannot interfere.

AUTHOR: Young, John

TITLE: A Free Market for Banking

CITATION: European Trends. n4. 1987. p. 45-52, 8 pages.

ABSTRACT: A 1985 White Paper, "Completing the Internal Market," began the drive to fulfill objectives of the treaty establishing the European Economic Community (EEC). It identified some 300 measures necessary to attain the internal market and set a timetable of legislative measures. In regard to financial services, the EEC's Commission now is seeking mutual recognition of national supervisory standards and relying primarily on home country control of financial firms. Another new proposal from the Commission states that banks should be free to provide services across borders and regulated mainly by authorities in their home country. Directives have been proposed concerning: 1. common accounting and disclosure requirements, 2. common accounting obligations of branches of foreign banks, 3. winding up of credit institutions, and 4. harmonizing the concept of own funds. To date, only the first of these directives has been adopted. Currently, directives on solvency ratios for credit institutions and on coordination of credit institutions are being prepared. While the directives are essential for free financial services, they may not be a sufficient condition. For instance, in wholesale banking markets, the domestic and Euro currency markets are likely to become more closely integrated.

AUTHOR: Anonymous

TITLE: Goodbye Yankees, hello Euros?

CITATION: Euroweek. UK Capital Markets: Into the Emu Era Supplement. Mar 1998. p. 54-56, 2 pages.

ABSTRACT: UK corporates have been regular and welcome issuers in the US Yankee market in recent years - as evidenced by the blow-out reception to Cable & Wireless' $1.8bn offering early March, the largest ever by a UK corporate issuer. For companies seeking long dated debt, the US market has been the only game in town and UK issuers have been able to achieve financing across the Atlantic than would simply not have been possible at home. But that is changing, with bankers believing that the Euromarket will soon present many more opportunities. The expansion of the Euromarket in the context of Emu is triggering the growth of a more efficient debt market; longer maturities are possible as the European government increasingly issue long term debt; and the practicalities if issuing in the Eurobond market are much simpler than the US. It is possible that the Yankee market is about to lose its competitive edge.

AUTHOR: Paris, Alan Lloyd

TITLE: Raising Euro awareness

CITATION: Wall Street & Technology. v16n5. May 1998. p. 64-69, 3 pages.

ABSTRACT: With the euro transition, systemic changes will need to be implemented across all lines of business, from the front office to the back office, in all financial software and throughout all functional support areas. One of the keys to successful euro project management is to realize that the impact of the European Monetary Union will affect not just Western Europe but also the US, Asia, Latin America, and Eastern Europe. It is critical for a company's euro efforts to be coordinated across international borders. The first thing that needs to happen when a company kicks off its euro convergence effort is that it has to build awareness. Senior-level support is key to creating the momentum required to move the euro project forward. Interviews with key personnel and reviews of existing shelf data are important to determine the company's operational, accounting, systems, legal, and trading risks associated with the introduction of the euro. The main steps to a euro strategic review include: 1. Review or create implementation plans 2. Evaluate the impact on the present operations. 3. Define key dependencies and determine if gaps exist.

AUTHOR: O Boyle, Paddy

TITLE: Are your accounting systems ready for the euro?

CITATION: Accountancy Ireland. v29n5. Oct 1997. p. 12, 1 pages.

ABSTRACT: Some of the issues involved in the changeover to the new European currency are discussed. As of January 1, 1999, the euro currency will exist as a separate unit of account, with the Irish Pound (and the currencies of other participating EMU countries) continuing to exist as a representation of the newly created single currency. The key issue for business in preparing for the changeover is to decide on the extent and timing of modification of internal accounting systems to recognize the new currency.

AUTHOR: Shephard, Simon

TITLE: Banking on the Euro

CITATION: Financial Executive. v13n6. Nov/Dec 1997. p. 28-30, 3 pages.

ABSTRACT: A recent survey found 80% of European financial and economic officials believe the EMU and euro will begin on schedule, January 1, 1999, and this growing confidence is evident in the accelerating pace at which banks and larger multinationals are making preparations. The conversion to the euro will surely have some impact on the banking activities of companies that have European operations or investments. The European central banks are developing a system known as Target, which will allow the transfer of funds between various national clearing systems for high-value payments. Banks' reporting capabilities should be flexible enough to accommodate accounting systems.

AUTHOR: Perrin, Sarah

TITLE: Welcome to the eurozone

CITATION: Management Today. Oct 1997. p. 52-56, 4 pages.

ABSTRACT: Under the proposed timetable for the single currency, non-cash payments may be denominated in the euro from January 1, 1999. From that point, not only will accounting systems need to cope with euro transactions, but whole business strategies will be under pressure as pricing policies become suddenly transparent within the euro zone. It seems that many businesses are anything but ready. Any company doing business with another inside the euro zone will need to adapt to the new currency in the same way as for any other foreign currency. The UK banking and financial services industry cannot avoid the euro. Multinationals, exporters and importers will need euro accounting ability to handle intra-company balances, and settle euro receipts and payments at the very least. Companies also need to review all their contracts to spot any involving currencies that will change to the euro. Theoretically, contracts running beyond the establishment of the fixed conversion rates could become invalid.

AUTHOR: Davies, Jonathan Kashmeri, Sarwar A Pompetzki, George Wilton, Wouter

TITLE: Penny wise, Euro foolish?

CITATION: Journal of Business Strategy. v18n5. Sep/Oct 1997.

ABSTRACT: In a roundtable discussion, 4 executives discuss the implications of European monetary union (EMU) for American businesses. According to George Pompetzki of Dover Corp., the immediate tax and accounting implications of EMU would be that there would be one currency for the major European business players, in effect reducing most of the exchange fluctuation for European subsidiaries of US companies. Jonathan Davies of Price Waterhouse feels that the costs, in terms of information technology, of actually making the changes necessary to cope with the euro provide the basis of much of Europe's concern. American companies that trade directly or indirectly through their affiliates in Europe need to deal with these systems issues as well.

AUTHOR: Keeling, Dennis

TITLE: The EMU time bomb

CITATION: Management Accounting. v79n3. Sep 1997. p. 34-37,

ABSTRACT: On January 1, 1999, the European Union's Economic and Monetary Union (EMU) of up to 12 of its member countries goes into effect. Every company that trades with or has branches or subsidiaries in Europe will be affected by this occurrence. There are two approaches that could be used to make the transition: the big bang approach and the phased approach. Since the only published currency will be the euro, all software will have to deal with an intermediate stage when performing conversions, as cross-currency rates will not be published. The euro will also affect pricing and packaging, banking, retail systems, and point-of-sale terminals. CFOs, treasurers, controllers, financial managers, and management accountants should take heed and find out now what their software suppliers are planning to do to solve the possible dilemma of the EMU.

AUTHOR: Crawford, Malcolm

TITLE: Eurocertainties

CITATION: Director. v50n11. Jun 1997. p. 54-58, 4 pages.

ABSTRACT: A majority of the small and medium-sized companies, and a number of big ones, do not want to see Britain joining the 1st set of countries in European Monetary Union (EMU), according to a CBI survey. British companies should adopt a 2-track scenario under the assumption that the euro will go ahead without the UK. They will also need to do some forward planning to anticipate the likely event that Britain will participate in it at some time during the life of the new government. Forward-thinking companies have grouped the practical issues under 3 headings: 1. legal and technical, 2. internal problems, such as information technology, accounting, and personnel, and 3. strategic issues.

AUTHOR: Coffin, Bill

TITLE: Euro: A four-letter word for expensive

CITATION: Best's Review (Life/Health). v98n2. Jun 1997. p. 80-83, 3 pages.

ABSTRACT: In 1999, the European Monetary Union will roll out the euro, a common currency. For insurers, the euro should offer wider investment opportunities and new marketing avenues. It will eliminate financial losses or regulation violations that could occur in handling international policies spanning several currencies. The result should be more incentive for insurers to diversify investment portfolios, spurring greater competition. To prepare for the euro, insurers need to appoint someone in charge of coordinating all eruo-related issues, such as accounting problems, salaries and investment problems. Just as important is educating policyholders, through toll-free help lines and mailers, about how the adoption of the euro will affect their policies.

AUTHOR: O Boyle, Paddy

TITLE: The Euro and smaller business

CITATION: Accountancy Ireland. v29n2. Apr 1997. p. 45,

ABSTRACT: The need to plan for the euro currency will require different approaches depending on the size of the company involved. While larger companies may be able to put in place dedicated project teams to deal with all the issues, such an approach is not feasible for smaller entities. They will be much more reliant on advice and support from external sources and will tend to be responding to initiatives taken by customers and suppliers rather than acting as drivers of change.

AUTHOR: Chapman, Christy

TITLE: Challenges from the Euro

CITATION: Internal Auditor. v54n2. Apr 1997. p. 11, 1 pages.

ABSTRACT: European monetary union is set to take place in 1999, but some organizations will have to account for the switch as early as 1998. Unfortunately, businesses are not ready for the euro switch, according to a KPMG survey of more than 300 large European companies.

AUTHOR: Mustonen, Jussi

TITLE: The euro is coming, but is business ready?

CITATION: Unitas. v68n4. 1996. p. 19-21, 3 pages.

ABSTRACT: The schedule for transition to a common currency in Europe leaves businesses 900-2,000 days to adapt to the change. Many major multinationals have already begun preparing for monetary union, to be able to take the earliest possible advantage from switching to the euro in their internal operations. Smooth transition to a common currency is dependent on the solution of several operational problems. A number of questions are unresolved. Companies need to know in plenty of time whether taxation

authorities will accept statements in euros even during the transitional period, in principle from the start of 1999. For bookkeeping, it must also be resolved whether all accounting items should use the exchange rate at the moment of transition or whether, for example, the valuation of capital items should be at the exchange rate at the time of acquisition. All information systems will have to be modified.

AUTHOR: Davies, Michael Davies, Paul

TITLE: A need for direction on millennium and euro costs

CITATION: Accountancy. v121n1254. Feb 1998. p. 70, 1 pages.

ABSTRACT: The Urgent Issues Task Force's draft abstracts - Year 2000: Treatment of Costs for Modifying Software, and Accounting Issues Arising from the Proposed Introduction of the Euro - are dividing the task force because some members are refusing to outlaw the early provisioning of costs to correct the millennium bug or to introduce the euro. In its 2 draft, the UITF says that, under FRED 14, companies cannot recognize year 2000 and euro introduction costs in advance of the actual expenditure because no obligation is said to exist. It is argued that, in fact, the task force is committing a serious blunder in assuming FRED 14 precludes early recognition.

AUTHOR: Grey, Sarah

TITLE: Big Talk

CITATION: Accountancy, v121n1254, Feb 1998 pp 24-36 3 pages

ABSTRACT: Far from winding down after its core standards are completed this year (probably), the International Accounting Standards Committee is already starting to grapple with new issues that could cause worse balzing rows than ever. The future existence of the IASC itself is even called into question by the emerging debate on strategy. Six IASC board members representing different interest groups, agreed to tackle some of the key issues over lunch while they were in London for last month's board meeting. The discussion was chaired by Sara Grey.

AUTHOR: Anonymous

TITLE: New paper on performance reporting

CITATION: Journal of Accountancy, v185n3, Mar 1998 pp27 1 pages

ABSTRACT: A group of international accounting standards setters issued a discussion paper on reporting financial performance. The FASB, IASC and the accounting standards boards in Australia Canada, New Zealand and the United Kingdom were involved in the special project.

AUTHOR: Bruno Solnik

TITLE: Equity Concepts and Techniques

CITATION: International Investments, pp 125-147

ABSTRACT: Special edition CFA candidate reading that discusses construction of international equity portfolio using multi-country model, an international capital asset pricing model, country risk and return considerations and study of dominant factors in portfolio mangers decision to invest abroad.

SOURCE: Financial Analysts Journal, May-June 1995 v51 n3 p30(12).

TITLE: Analysts forecasting errors and their implications for security analysis.

AUTHOR: David N. Dreman and Michael A. Berry

ABSTRACT: A sample of 66,100 analysts' consensus estimates demonstrates that forecasts differ significantly from actual earnings. A minority of quarterly estimates fall within a range around reported earnings considered acceptable to many professional investors. Error rates are not meaningfully affected by the business cycle or industry groupings and appear to be increasing over time.

SOURCE: Financial Analysts Journal, Nov-Dec 1997 v53 n6 p81(8).

TITLE: Analyst forecasting errors: additional evidence.

AUTHOR: Lawrence D. Brown

ABSTRACT: The size of analyst forecasting errors, their pattern over time, and their sensitivity to certain firm-specific factors are examined. Among the firm-specific factors are inclusion in the S&P 500 Index, market capitalization, absolute value of predicted earnings per share, analyst following, and industry classification. The size of errors has changed over time and is sensitive to these firm-specific factors.

SOURCE: Financial Analysts Journal, March-April 1997 v53 n2 p13(7).

TITLE: Earnings surprise research: synthesis and perspectives.

AUTHOR: Lawrence D. Brown

ABSTRACT: An investigation of the relation between earnings surprise and three empirical anomalies - the P/E effect, the size effect, and the Value Line enigma - indicates that the standardized unexpected earnings (SUE) effect appears to to be separate and distinct from each of the three. The relations between the SUE phenomenon and firm risk, the appropriateness of the earnings expectations model, and the role transaction costs are also investigated. The SUE phenomenon is not attributable to inappropriate risk adjustment, use of the "wrong" earnings expectations model, or ignoring transaction costs. The SUE effect may be partly explained by analysyts' behavior and is both predictable and profitable. The SUE effect has also been observed in Japan.

SOURCE: The Journal of Accounting and Economics, May 1997 v23 n1 p53(29).

TITLE: The information content of earnings and prices: a simultaneous equations approach.

AUTHOR: William H. Beaver, Mary Lea McAnally and Christopher H. Stinson

ABSTRACT: The simultaneous equations approach proves to be effective in terms of determining the relationship between securities prices and earnings. Some of the features of simultaneous equations approach that can be of great help in analyzing price-earnings relation include well-tested alternative estimation procedures and theoretically proven earnings and return response coefficients. Earnings and prices are endogenous in nature and are affected by factors that are not easy to specify.

SOURCE: Investors Chronicle, Oct 4, 1996 v118 n1496 p20(1).

TITLE: Proof that the peg fits.(different methods of investment analysis)

AUTHOR: Jim Slater

ABSTRACT: Jim O'Shaughnessy has set out criteria for identifying shares likely to perform well. His criteria were established after analyzing share data going back 43 years. Shares that have performed well tend to have strong asset values and cash flows and high levels of sales compared to market capitalization. Other factors could be added to O'Shaughnessy's list, such as using the consensus forecasts of brokers, and accelerating earnings.

SOURCE: Journal of Accounting Research, Autumn 1996 v34 n2 p235(25).

TITLE: The articulation of price-earnings ratios and market-to-book ratios and the evaluation of growth.

AUTHOR: Stephen H. Penman

ABSTRACT: A study was conducted to interpret the price-earnings ratio (P/E) and the market-to-book ratio (P/B) and describe their articulation. It also aimed to explain the role of book rate-of-return on equity in determining the ratios and the relation between them. The P/E ratio signifies future growth in earnings positively related to expected future return on equity and negatively related to current return on equity. On the other hand, the P/B ratio indicates only expected future return on equity. The articulation of the two was based on the dividend discount formula and the clean-surplus accounting relation, in addition to a description of normal expected return on equity that equals cost of capital. Empirical evidence showed that return on equity reflects differential P/B ratios but not P/E ratios, except in the extremes. However, current return on equity is not a good indicator of P/E.

SOURCE: Journal of Accounting and Public Policy, Fall 1995 v14 n3 p233(29).

TITLE: Financial analysts' earnings forecasts and insider trading.

AUTHOR: Steven Lustgarten and Vivek Mande

ABSTRACT: Trading patterns in a firm are examined to determine whether insiders use their advance knowledge of the company's forthcoming earnings in making decisions when trading in their firm's stock. The study also investigates the changes made by financial analysts in their forecasts after insider trading. Findings reveal that company insiders deliberately postpone trading until after earnings announcements are made. Results also show that the earnings forecast revisions of financial analysts are positively related to insider purchases, but negatively related to insider sales.

SOURCE: Journal of Accounting Research, Autumn 1995 v33 n2 p317(18).

TITLE: The impact of earnings announcements on the permanent price effects of block trades.

AUTHOR: Lane A. Daley, John S. Hughes and Judy D. Rayburn

ABSTRACT: The permanent price effects that are observed in block trades are investigated in terms of how they are affected by earnings announcements. These price effects are examined before and after earnings announcements to test the hypothesis that expected public disclosures facilitate the acquisition of private information. The study seeks to determine whether there is greater price adjustments before earnings announcements or after earnings announcements. It also investigates the impact of earnings disclosure on the temporary price effects of block trades. Findings indicate that the acquisition of private information may be more valuable in pre-earnings announcement periods when earnings have greater potential to be informative.

SOURCE: The Journal of Accounting and Economics, July 1995 v20 n1 p31(30).

TITLE: Analysts' forecasts as proxies for investor beliefs in empirical research.

AUTHOR: Jeffery S. Abarbanell, William N. Lanen and Robert E. Verrecchia

ABSTRACT: A model of rational trade which incorporates earnings forecasts has been developed. The model, combined with analysis, showed that relations among forecast properties, theoretical constructs of investor attitudes and price and volume response to earnings announcements are complex and sometimes counter-intuitive. Results indicate that the model can aid in the understanding and interpretation of empirical investigations and developing empirical tests of market reactions to announcements.

CITATION: Journal of Accounting Research. v35n2. Autumn 1997. p. 193-211, 19 pages

TITLE: The relative informativeness of analysts' stock recommendations and earnings forecast revisions

AUTHOR: Francis, Jennifer Soffer, Leonard

ABSTRACT: A paper examines the association between security returns and 2 attributes of sell-side analyst reports - stock recommendations (new and reiterated) and earnings forecast revisions. Other information in analyst reports is usually presented to support these 2 assessments of expected future firm performance. Tests attempt to distinguish the view that these 2 signals convey distinct information from the view that one signal subsumes the other. Results indicate that recommendations are informative. As a group, and after controlling for earnings forecast revisions, variables capturing the level of and the revision in stock recommendations explain a significant portion of the variation in cumulative abnormal returns.

CITATION: Journal of Accounting Research. v35n1. Spring 1997. p. 1-24, 24 pages.

AUTHOR: Abarbanell, Jeffery S Bushee, Brian J

TITLE: Fundamental analysis, future earnings, and stock prices

ABSTRACT: A paper investigates how detailed financial statement data (fundamental signals) enter the decisions of market participants by examining whether current changes in the signals are informative about subsequent earnings changes. The approach is consistent with the view expressed by Penman (1992) and others that predicting accounting earnings, as opposed to explaining security returns, should be the central task of fundamental analysis. Studying the links between fundamental signals and future earnings changes allows the validity of the economic intuition that underlies the original construction of the signals to be tested directly. The results support the validity of much of the economic intuition that has been used to link current accounting information to earnings changes. Similarly, it is found that analysts' revisions of earnings forecasts are associated with many, but not all, of the signals that predict future earnings. Tests based on contemporaneous security returns reveal that the fundamental signals convey value-relevant information orthogonal to forecast revisions.

CITATION: Journal of Accounting Research. v35n2. Autumn 1997. p. 157-179, 23 pages.

AUTHOR: Walther, Beverly R

TITLE: Investor sophistication and market earnings expectations

ABSTRACT: A paper investigates whether sophisticated investors rely more on analyst forecasts than on time-series model forecasts in forming expected earnings. Although analyst forecasts are generally more accurate than time-series model forecasts, analyst forecasts are not clearly superior to time-series model forecasts as a proxy for expected earnings. Specifically, the study investigates if earnings- announcement-related returns are more closely associated with analyst forecasts for firms for which the marginal investor is more likely to be sophisticated. It is predicted that market participants place more weight on the analyst forecast for firms with high institutional ownership, firms with high analyst following and large firms.

CITATION: Contemporary Accounting Research. v14n3. Fall 1997. p. 397-433, 37 pages.

AUTHOR: Calegari, Michael Fargher, Neil L

TITLE: Evidence that prices do not fully reflect the implications of current earnings for future earnings: An experimental markets approach

ABSTRACT: Analysts have been found to underweight the innovation in the most recent quarterly earnings when forecasting next-quarter earnings, and these expectations have been posited as an explanation for post-earnings- announcement drift. A study uses an experimental asset market to examine whether similar errors in forecasting quarterly earnings are made by student- subjects. It examines 2 aspects of their behavior: 1. Do subjects underestimate the autocorrelation in quarterly earnings when forming earnings expectations? 2. Are asset prices consistent with a subject's underestimation of the autocorrelation in quarterly earnings?

CITATION: Journal of Business Finance & Accounting. v24n6. Jul 97 851-867, 17 pages.

AUTHOR: Lobo, Gerald J Tung, Samuel

TITLE: Relation between predisclosure information asymmetry and trading volume reaction around quarterly earnings announcements

ABSTRACT: A study investigates the effects of differences in predisclosure information asymmetry on the trading volume reaction during quarterly earnings announcements. The analyses show that trading volume reaction to quarterly announcements is positively related to the level of predisclosure information asymmetry and to the magnitude of the price reaction to the announcements. These results are consistent with Kim and Verrecchia's (1991) theoretical trading volume proposition, and with Atiase and Bamber's (1994) tests of the proposition based on annual earnings announcements. The study also provides evidence on the relation of predisclosure information asymmetry and trading volume before and after quarterly earnings announcements.

AUTHOR: Beneish, Messod D Press, Eric

TITLE: The resolution of technical default

CITATION: Accounting Review. v70n2. Apr 1995. p. 337-353, 17 pages

ABSTRACT: Although costs of default underpin the debt covenant hypothesis, prior research provides limited evidence of their nature, magnitude, and impact on shareholder wealth. It is shown that announcements of technical default are associated with significant stock price declines. Combining post-default changes in terms of debt contracts with stock returns, a study examines whether the consequences arising from renegotiation of lending agreements are priced in the market, and estimates that higher costs of borrowing and new restrictions on firms' opportunities impose wealth losses of 1.4% on shareholder. Leverage measures, frequently used in accounting research as proxies for economic effects of debt contracts, are found to be poor surrogates for default or renegotiation costs.

AUTHOR: Ward, Terry J Foster, Benjamin P

TITLE: A note on selecting a response measure for financial distress

CITATION: Journal of Business Finance & Accounting. v24n6.Jul 1997. p.869-879, 11 pages.

ABSTRACT: Since 1966, researchers have examined financial distress prediction models to determine the usefulness of accounting information to lenders. These researchers primarily used legal bankruptcy as the response variable for economic financial distress, or included legal bankruptcy with other events in dichotomous prediction models. However, theoretical models of financial distress normally define financial distress as an economic event, the inability to pay debts when due (insolvency). A study uses a loan default/accommodation response variable as a proxy for the inability to pay debts when due. The study's empirical results show that legal bankruptcy and loan/default accommodation financial distress prediction models produce different statistical results, thus suggesting that the responses measure different constructs. A loan default/accommodation model also fits the data better than a bankruptcy model. The results suggest that a loan default/accommodation response may be a more appropriate measure to determine which accounting information is most useful to lenders in evaluating a firm's credit risk.

AUTHOR: Silver, Jay

TITLE: Use of cash flow projections

CITATION: Secured Lender. v53n2. Mar/Apr 1997. p.64-68, 3 pages.

ABSTRACT: The process of preparing cash flow projection leads management to focus on the financial condition of the company. Financial institutions use the projection to understand the company's business and determine if it is a viable candidate for financing. The preparation begins with a complete review of the company's current business and financial position within its respective market. The review should encompass an analysis of the company's competitors, product lines, sources of suppliers, relationships with the suppliers, manufacturing process, gross profit sales dilution, overhead, and potential for new opportunities. Perhaps the most important projection element is the estimate of gross profit. This estimate determines the company's profitability, inventory levels, cash flow and overall financial viability. The final analysis is the company's balance sheet. Prospective financial presentations are based on estimates and assumptions regarding future events. Generally, the use of prospective financial presentations refers to the use of information by persons with whom the responsible party is not negotiating directly.

AUTHOR: Wolkenfeld, Suzanne

TITLE: Predicting changes in credit quality with CFAR

CITATION: TMA Journal. v18n1. Jan/Feb 1998. p.39-42, 4 pages.

ABSTRACT: Three years ago, Fitch IBCA established an analytic methodology that marked a departure from the traditional approach of other rating agencies. Relying less on such ratios as debt/capital and EBIT/interest, Fitch IBCA gives primacy to cash flow measurements. Its approach focuses on the cash flow adequacy ratio (CFAR) in conjunction with other cash measures such as net free cash flow and risk-adjusted leverage. Fitch IBC A's formulation of CFAR attempts to redress some of the weaknesses of traditional analytical ratios by offering a dynamic view of a company's credit quality, which captures its direction of change. CFAR is based on the premise that companies generating strong net free cash flow from operations relative to maturing debt have better credit profiles that those forced to rely on outside resources of capital. The usefulness of analyzing a company's CFAR over time is not limited solely to providing bondholders with an insight into trends in credit quality. Equity investors are also encouraged to use this analytical tool.

AUTHOR: Gopalakrishnan, V Parkash, Mohinder

TITLE: Borrower and lender perceptions of accounting information in corporate lending agreements

CITATION: Accounting Horizons. v9nl. Mar 1995. p.13-26, 14 pages.

ABSTRACT: A study surveys borrower and lender perceptions of: I. the use of accounting information in debt covenants, 2. the economic consequences of debt covenant violations, and 3. the renegotiations following violation. The results show that debt-to-equity ratio and tangible net worth covenants are the most likely covenants to contribute to a default in both public and private debt. The evidence also supports the assertion that private debt agreements include more restrictive covenants, resulting in a higher likelihood of violations than in public debt. Some 93% of responding lenders do not perceive violations of accounting-based debt covenants as serious. Both borrowers and lenders indicate a waiver of violations as the most likely consequence. The probability of waiver is perceived to be higher for private than for public debt. The cost of waivers is lower for private debt. In choosing accounting methods, borrowers rank the political environment, industry convention, and the level of reported income as the top 3 factors.

AUTHOR: Beneish, Messod D Press, Eric

TITLE: Interrelation among events of default

CITATION: Contemporary Accounting Research. v12n1. Fall 1995, p.57-84, 28 pages.

ABSTRACT: A study contrasts technical default, debt service default and bankruptcy, and establishes that the valuation effects of their announcements are significant and increasingly severe. It shows the events are interrelated. Specifically, it shows that technical default is a timely warning of further distress insofar as adverse stock price effects of debt service default are mitigated if preceded by technical default. This arises in part because technical default increases the likelihood of further distress. The extent of the mitigation suggests reduced costs of future distress, likely because technical default triggers the early exercise of contractual rights that allow lenders to increase control over the firm. The study also evaluates explanations of why debt service and bankruptcy occur without firms first reporting technical default. It is found that it is not because debt agreements are written with too much covenant slack, nor are material cases of non-reporting of covenant defaults observed. It is concluded that covenants do not always provide warnings of future difficulties.

AUTHOR: Cheng, Peter Coulombe, Daniel

TITLE: Why managers voluntarily make income increasing accounting change

CITATION: Journal of Business Finance & Accounting. v23n4. Jun 1996. p. 497-511, 15 pages.

ABSTRACT: A study presents an explanation of why managers might elect to modify their reporting strategy. It is proposed that accounting choices are a function of external costs, manager compensation schemes and debt constraints. Facing adversity and the strict probability of technical default, the manager would be motivated to effect an income increasing accounting change. The share price effect of a change announcement is then analyzed as a function of investors' rational expectations of the manager 5 reporting actions and the level of information about adversity that investors may have prior to the change announcement. A model shows that if the investors do not have any prior information about adversity, the market reaction is negative. The market impact on the date of change announcement is shown to be negatively correlated with the amount of information that the investors may have.

AUTHOR: Griner, Emmett H Huss, H Fenwick

TITLE: Firm Size, Insider Ownership and Accounting-based Debt Covenants

CITATION: Journal of Applied Business Research. v11n4. Fall 1995. p.1-8, 8 pages.

ABSTRACT: A study investigates the separate and joint effects of firm size and insider ownership on the types of debt covenants required by creditors. An economic argument is developed to predict the types of covenants that will be required by creditors of firms of different sizes and with differing levels of insider ownership. The main finding is that creditors of small, high-insider-ownership firms demand liquidity covenants as protection against wealth transfers. An additional finding is that creditors of large firms demand covenants based on tangible assets, regardless of the level of insider ownership. The main conclusion is that the specific types of debt covenants required by creditors depend on creditors' expectations concerning the effects of size and insider ownership on management actions.

AUTHOR: Strischek, Dev

TITLE: Coming to terms with financial covenants

CITATION: Journal of Commercial Lending. v76n5. Jan 1994. p.11-17, 7 pages.

ABSTRACT: Covenants are a crucial part of a loan agreement because they control future actions and events. The lender needs to contemplate the kinds and probabilities of risks that might undermine the borrower's profitability. The key is to select financial covenants that stabilize the financial structure and protect the assets from losing value. The combination of the current ratio, net working capital, debt-worth ratio, and net worth covenants is sufficient for preserving and maintaining the borrower's balance sheet. A few financial covenants can improve the odds for repayment by preserving and maintaining a borrower's resources.

AUTHOR: Rizzi, Joseph V

TITLE: Determining debt capacity

CITATION: Commercial Lending Review. v9n2. Spring 1994. p. 25-34, 10 pages.

ABSTRACT: A framework is provided for measuring debt capacity from a creditor's viewpoint. The framework can assist borrowers in managing their capital structures and lenders interested in maintaining asset quality. The focus is not on an optimal capital structure or the maximum debt the firm can service. Rather, it is on the amount of debt that a firm can use intelligently, given the size and variability of its expected cash sources and needs within its overall economic environment. Debt capacity analysis begins with the review of operating projections. Five static models of debt capacity are described: comparative industry ratio analysis and bond rating target, both based on measures of balance-sheet leverage; capitalized discretionary cash flow; and asset-based lending and business-value lending, both based on measures of asset values. The temporary debt concept, a dynamic model used for highly leveraged transactions, is described.

AUTHOR: Stevenson, Bruce G Fadil, Michael W

TITLE: Modern portfolio theory: Can it work for commercial loans?

CITATION: Commercial Lending Review. v10n2. Spring 1995. p. 4-12, 9 pages.

ABSTRACT: Modern portfolio theory (MPT) is the dominant theoretical framework for investment management. Two recent approaches to commercial loan portfolio management within the context of MPT are risk-adjusted pricing and concentration limits. Risk-adjusted pricing is a practice in which capital is allocated to individual loans or lending relationships, and pricing is set to deliver a target return on risk-adjusted equity. Concentration limits are simple caps on the exposure to a single borrower or industry that attempt to limit portfolio losses in credit downturns. MPT can, and does, allow commercial bankers to achieve portfolio growth, credit quality, and profitability, particularly if they adopt a long-term perspective.

AUTHOR: Lentino, James V Rizzi, Joseph V

TITLE: Credit analysis for highly leveraged credits: Deja vu all over again

CITATION: Commercial Lending Review. v11n1. Winter 1995/1996. p. 21-28, 8 pages.

ABSTRACT: Leveraged lending, the scapegoat for many mistakes of the 1980s, is in vogue again. Leveraged lending involves an understanding of the dynamic relationship between business risk, financial risk, and structural risk. For a given level of business risk, there is a maximum level of acceptable financial risk. In evaluating financial risk, the analyst must assess not only the risk of default but also the risk of loss in the event of a default. Creating acceptable levels of financial risk to match a company's business risk profile is the role of structure, which involves an evaluation of the relationship between senior debt, subordinated debt, and equity so as to create the proper level of debt service coverage and asset coverage for a given level of business risk. Although highly leveraged transactions are riskier than traditional bank loans, these risks are manageable.

AUTHOR: Meyer, Douglas W

TITLE: Using quantitative methods to support credit-risk management

CITATION: Commercial Lending Review. v11n1. Winter 1995/1996. p. 54-70, 17 pages.

ABSTRACT: Traditional credit-risk management relies upon the experience and judgment of trained, seasoned credit officers to make informed decisions on the financial soundness of credit seekers. This traditional mode is time-consuming and costly but necessary. Quantitative methods bridge the gap between the handcrafted, experience-based, labor-intensive credit culture of tradition and today's slimmed-down, automated, decision-tree approach. Quantitative methods can empower the credit function, provided that the limits of the quantitative approach are recognized and appreciated. Quantitative methods include various statistical analyses designed to illuminate trends in data populations. In quantifying credit risk, these methods can be applied against large databases of credit information, facilitating decisions by supporting an understanding of the riskiness inherent in pools of loans. Quantitative methods drive the analytic models that support risk management.

AUTHOR: Hyndman, Carl L

TITLE: Portfolio management moves to the fore

CITATION: Commercial Lending Review. v13n2. Spring 1998. p. 61-65, 5 pages.

ABSTRACT: As the banking industry continues to explore opportunities to improve its risk-management techniques, the concept of portfolio management is taking on greater significance, driven in part by regulatory interest. The Office of the Comptroller of the Currency issued Advisory Letter 97-3 reminding bankers that it is imperative, even in good times, to remain focused on credit and portfolio management issues. The advisory letter asked banks to continue being vigilant in tracking individual loans but also to begin viewing risk management in terms of a portfolio approach. Currently only the largest money center banks do this to any significant extent.

AUTHOR: Taylor, Jeremy D

TITLE: Cross-industry differences in business: Failure rates: Implications for portfolio management

CITATION: Commercial Lending Review. v13n1. Winter 1997/1998. p. 36-46, 11 pages.

ABSTRACT: By ignoring the variability within and between more narrowly defined industry segments, banks miss opportunities to control more closely and to improve the portfolio mix, and thereby to enhance earnings quality. A bank may, for instance, show only moderate exposure to the manufacturing sector, which shows only an average rate of business failures only slightly above the industry average, as a whole. Yet it will likely have loan portfolio concentrations within manufacturing. An examination of business failure rate data at a 2- or 3-digital SIC level reveals significant differences between segments in: 1. their average default rates, 2. the variability over time in their default experience, and 3. their covariability (or tendency to fluctuate in sympathy) with changing default experience in other segments and with the economy at large. To the extent that a segment shows high levels of some or all of these 3 measures, prudence would suggest reviewing exposure to that segment.