Explore the vast range of titles available.

We compare the structure and performance of private (non-GSE) mortgage-backed securities sold by large issuers vs. those sold by small issuers over the period 2000–2006. Securities sold by large issuers have less subordination—a greater fraction of the deal receiving AAA rating—than those sold by small issuers. Prices for AAA-rated and non-AAA rated tranches sold by large issuers fell more when the market turned down than those sold by small issuers, and this difference was concentrated among tranches issued between 2004 and 2006. These results suggest that rating agencies grant favorable ratings to large issuers, especially during market booms.

Contracts and other transaction documents are frequently said to be complex and difficult to read in order to avoid ambiguity and mistakes. I argue that such complexity has not solved these problems, and may have exacerbated them. Moreover, the problems are likely more widespread than generally appreciated. I examine some typical provisions of a revolving credit agreement that seem secure but that on closer examination (as might be given in litigation) contain potentially serious ambiguities and mistakes. These problems are not isolated instances of bad drafting but symptoms of a systemic problem. I suggest some partial remedies, some simple to implement but others requiring a more radical rethinking as to how a document should work.

This chapter discusses the importance of Zoe's Lemonade Stand by estimating the cash flows it will generate over its useful life and then discounting those cash flows back to the present to account for the time value of money and uncertainty of the cash flow estimates. Less predictable cash flows are less valuable in today's dollars than are more predictable ones in business. There is a need to discount them at a higher rate. Predicting events in the future is difficult and highlights the biggest challenge in using a DCF to value a business. The discount rate used will incorporate the time value of money and capture the uncertainty of the issuing entity's ability to pay the coupons and repay the principal amount at maturity. There is a litany of different scenarios that could unfold even with a simple business like Zoe's Lemonade Stand, each with differing probabilities of occurring, and all resulting in different cash flow predictions.

The Financial Accounting Standards Board attempts to improve reporting and disclosure of derivative transactions through SFAS Nos. 105, 107, and 119. These statements require recognition of gains or losses on trading purpose derivatives, and disclosure of notional principal amounts, credit exposures, and fair values of trading and nontrading derivatives. Using a multiple regression model, this study investigates the relevance of these disclosures to stock returns for a sample of large banks. All derivatives-related disclosures, except for notional principal amounts, are found to contain new information not incorporated in market beta and earnings. These results support the Board's derivative disclosure requirements. [PUBLICATION ABSTRACT]

A comprehensive empirical examination of a relatively new form of leverage-increasing transaction known as a leveraged recapitalization (LR) is presented. Although similar to a leveraged buyout, the LR differs from LBOs in that the firm remains public instead of going private. We find significant positive abnormal returns to equityholders, without losses to existing bondholders. We examine the financial characteristics of LR firms and find evidence in support of Jensen's free cash flow hypothesis.

Historically, debtors have considered a troubled loan workout to be a viable alternative to a foreclosure or deed in lieu of foreclosure, at least in part because of the potential to avoid incurring a tax liability. However, the application of the original issue discount principles to debt instruments issued for nontraded property as part of the Deficit Reduction Act of 1984 will change the focus in real estate workouts if the proposed regulations issued pursuant to Internal Revenue Code Section 1274 are finalized in their current form. To the surprise of tax practitioners who considered a loan modification to be a nontaxable event to the debtor, the proposed regulations could force the debtor to recognize income from discharge of indebtedness even if the stated principal amount of the loan is not modified. Some important factors include the status of the lender as either a financial institution or the seller of the property securing the loan and the terms of the proposed restructuring.