Fayez A. Elayan

Creditworthiness or Management Signal? An Empirical Investigation of Loan Commitments Obtained by Non-Taxable Firms

Market reaction to the announcement of obtaining loan commitments (LCs) is examined for a unique sample of tax-exempt real estate investment trusts (REITs). Debt-interest tax incentives may be ruled out on a theoretical basis and empirically due to a significant positive market reaction. Thus, evidence is developed to differentiate between two signaling-effect explanations. The analysis supports the hypothesis that management procures LCs to undertake new real estate investments. This action is interpreted by the market as a signal of managements superior information regarding the REITs true equity value.

The valuation effects of bank loan ratings in the presence of multiple monitors

Studies have shown that when two information providers or outside auditors exist, the value provided by the second one will be decreased by the actions of the first. Credit rating agencies have been rating bank loans since 1996. Capitalizing on the highly similar functions performed by banks and these agencies, the informational value of bank loan ratings is examined. Further, evidence is provided on whether rating agencies duplicate the certifying and monitoring roles played by banks. The significant market reaction to negative bank loan rating announcements suggests these rating actions convey information beyond that provided via bank loan approvals and renewals.

Unfair 'Fair Value' in an Opaque Credit Default Swap Market: How Marking-to-Market Pushed the International Credit Crunch

Mark-to-market accounting, as required by FAS No. 157, has been implicated as a contributor to the financial meltdown caused by the housing crisis and the consequent write-down of securities backed by mortgages (MBS) and collateralized debt obligations (CDO). In this paper, we investigate the effects of mark-to-market accounting write-downs by financial institutions on equity returns, trading volume, and CDS premiums and whether the write-downs induced contagion effects on similar institutions without write-downs. Specifically, we examine whether equity returns and CDS premiums of the similar institutions responded significantly to write downs by peer firms. We find that firms that write down assets to their exit values in accordance with FAS No. 157 not only experience significant abnormal negative returns and a spike in the premiums of CDS written on their obligations – indicating higher default probability – but that similar firms without write downs exhibit a sympathetic and significant negative abnormal returns as well at the same time as the write-down firms. This is clear evidence of contagion effects induced by FAS No. 157 mark-to-market accounting. The analysis shows significant cross-sectional determinants of both equity abnormal returns and CDS premiums to generally include the measurement levels under FAS 157, liquidity, the amount of the write-down and rating changes.

Ethical Performance, Financial Performance and the Quality of Financial Reporting

This research examines the economic impact of firms acting ethically on financial reporting performance and quality. We assess the impact of quarterly changes in the Covalance Ethics Index (CEI) rankings compared to firm financial performance (FP) and financial reporting quality (FRQ). A significant positive (negative) stock market reaction to CEI upgrades (downgrades) is observed. Further, the results of correlation and logistic regression analysis suggest that a positive association between increased firm ethical behaviour and performance exists. Finally, multivariate analysis consistently shows that CEI ranking downgrades reflect both lower FP and FRQ rankings. Collectively, these results suggest that corporate measures taken to increase ethical performance are associated with positive benefits to shareholders.

Option Backdating: Market Overreaction and Management Motives

Prior studies on option backdating have focused exclusively on the initial backdating investigation announcements. We extend the analyses to consider the outcomes of the investigation as well. By examining the market responses both to the initial investigation announcement and to the investigation outcome, we provide an evidence that the market may have overreacted to the initial investigation announcement. Our results also show that the media bias in covering more bad than good news may have contributed to the overreaction. Finally, we re-examine the issue of management motives, focusing on firms which were found to be guilty of intentional backdating. No prior study has addressed the motive issues with the sample of “true” backdators before.

Guilty Until Proven Innocent: The Economic Consequences of the Initiation and the Outcome of Internal Investigations of Option Backdating

Backdating occurs when a company retroactively changes option grant dates to dates when its stock was trading at a relatively low price. Firm announcements of backdating generated adverse media publicity and negative pronouncements from academics regarding the economic effects and motivation of those involved. We find evidence that management engages in backdating to generate motivational benefits for employees rather than enriching themselves. By not accounting for the outcomes of the investigations the economic impact of these events is overstated and unfairly portrays nearly half of the firms as guilty when they have not engaged in intentional backdating.

To Tax or Not to Tax Income Trusts: The Valuation Effect of a Canadian Dividend Tax Cut

In September of 2005, the Canadian government launched a consultation process with regard to the non-taxable status of income trusts. Less than two weeks later, they announced that the issuance of advance rulings with regard to the creation of new income trusts was being suspended. Although everyone anticipated that the governments next move would be to eliminate the tax-free status of income trusts, instead, on November 23, 2005, they announced a reduction of the tax on dividend income in an effort to eliminate the tax systems bias in favor of income trusts relative to non-income trusts. We examine the economic impact of that announcement of November 23, 2005 on the income trust sector.