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THE MOTIVES AND CONSEQUENCES OF DEBT‐EQUITY SWAPS AND DEFEASANCES: MORE EVIDENCE THAT IT DOES NOT PAY TO MANIPULATE EARNINGS
Author(s) -
Hand John R. M.,
Hughes Patricia J.
Publication year - 1990
Publication title -
journal of applied corporate finance
Language(s) - English
Resource type - Journals
eISSN - 1745-6622
pISSN - 1078-1196
DOI - 10.1111/j.1745-6622.1990.tb00211.x
Subject(s) - earnings , equity (law) , swap (finance) , book value , quarter (canadian coin) , earnings per share , commission , net income , economics , debt , net asset value , business , accounting , finance , political science , archaeology , law , history
On February 9,1982, Hammermill Paper registered with the Securities and Exchange Commission to swap as many as 400,000 common shares for $13.4 million of the company's 8.07% promissory notes due February 1, 1997. The resulting swap increased Hammermill's 1st quarter earnings by $3.7 million, accounting for more than a third of its earnings for that period. Between February 9 and 10, the market value of Hammermill's equity fell by 4.5%. On January 28, 1985, United Airlines announced that its preceding 4th quarter earnings included a $3 million extraordinary gain from the defeasance of $38 million of outstanding notes, and that earnings for all of 1984 included a defeasance gain of $21.5 million, representing 7.6% of UAL's 1984 net income. Between January 28 and 29, the market value of UAL's equity declined by 4.6%.