Early debt-redemption: An empirical investigation of motivation and impact.
Item
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Title
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Early debt-redemption: An empirical investigation of motivation and impact.
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Identifier
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AAI9108130
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identifier
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9108130
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Creator
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Kim, Tae-Yong.
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Contributor
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Adviser: Steven B. Lilien
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Date
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1990
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Language
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English
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Publisher
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City University of New York.
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Subject
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Business Administration, Accounting | Economics, Finance | Business Administration, Banking
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Abstract
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The objectives of this study are to answer three economic questions: (1) Why and when did firms undertake early debt-redemption (EDR)? (2) What was the impact of EDR on the equity value of those firms which undertook EDRs? (3) Are there any differences in motivations and impacts of EDR in terms of different time horizons and different means used to achieve EDRs? This paper uses a sample of all types of EDRs during the decade of the 1980s (1977-1988). This allows a comprehensive analysis of EDRs and a more robust test of prior evidence such as the income smoothing hypothesis because the current sample includes both gains and losses from EDRs. As an alternative explanation of motivations behind EDRs, the study proposes leverage adjusting and financial distress hypotheses because the main outcome of EDR is leverage reducing effects while income smoothing through EDR is a by-product of EDR.;The study finds some support for the income smoothing hypothesis in that EDRs did smooth the aggregate quarterly income of redeemers for both EDRs resulting in redemption gains and EDRs resulting in redemption losses. However, contradicting evidence indicates that not all EDRs did smooth income. While the evidence is ambiguous whether firms used EDRs to smooth reported income, the evidence is very clear that firms undertook EDRs when their financial leverage was at a peak and their distress level was at the bottom across time. The importance of EDRs in reducing leverage and associated covenant constraints is confirmed by time-series plotting analysis with location tests and a series of cross-sectional univariate and multivariate tests. The test results confirm that the motivation to reduce leverage and improve financial distress ratios explains the decision to proceed with EDRs better than explanations based on the smoothing of income.;The results of the market study indicate that the early retirement of debt is, in general, negatively associated with the firm's equity value. This result implies that leverage-reducing capital structure change such as EDR conveys unfavorable information about the firm's prospect and thus equity holders are worse off from early retirement of debt.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
