This study investigates the relationship between dirty surplus items on the balance sheet and the cost of debt for Japanese firms. We focus on three dirty surplus items — unrealized gains and losses on available-for-sale securities (SEC), foreign currency translation adjustment (FOC), and land...

We examine how equity-market frictions that restrict pessimistic trading, such as short-sale constraints, affect assessments of default risk. We find that these frictions decrease the usefulness of equity-market variables for identifying defaulting firms but increase their usefulness for...

Recent decades have witnessed several waves of buyout activity. We find LBOs to be a significant concern for bondholders by showing that a) intra-industry credit spreads increase upon an LBO announcement, b) yields on bonds without event risk covenants are, on average, 21bps higher than those on...

In this paper I review the definition of weighted average cost of capital and derive the discount coefficient of the firm's cash flows which preserves linearity of the present value function within each discounting period, i.e. in each discounting period the sum of the present value of each cash...

Mispricing and risk have both been suggested as explanations for the cross-sectional relation between stock returns and firm characteristics such as accruals. As emphasized by Ferson and Harvey (1998) and Berk, Green and Naik (1999), it is difficult to evaluate these competing explanations...

We examine the impact of earnings management uncertainty (EMU) on bond yield spreads in China. In the process, we decompose the bond yield spread into liquidity and default yield spreads. The findings suggest that EMU primarily drives the default yield spread of a corporate bond and that its...

We model and estimate the term structure of implied costs of equity capital (and implied risk premia) at the firm level for the years 1996-2015 from forward looking option contracts. Empirical tests reject the assumption that the term structure of implied firm-level costs of equity is constant...

This paper shows how the outputs of the accounting measurement process can be translated into terms that can be used in economic decisions. We introduce the notion of Term Structure of Capital Values (TSCV), uniquely associated to a Term Structure of Interest Rates (TSIR). We show that the state...

In fundamental analysis, it is often the case that financial/accounting variables, price multiples and risk premium are either knowingly or inadvertently treated as free parameters without any restriction. However, there exist endogenously determined relations among them in market equilibrium....

We document that historical patterns of accruals seasonality predict future stock returns. Firms with historically larger accruals in a given quarter of the year earn lower stock returns when those accruals are expected to be announced. The accruals seasonality spread is significant only in the...