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The Motives And Consequences Of Debt‐Equity Swaps And Defeasances: More Evidence That It Does Not Pay To Manipulate Earnings

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  • John R. M. Hand
  • Patricia J. Hughes

Abstract

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%.

Suggested Citation

  • John R. M. Hand & Patricia J. Hughes, 1990. "The Motives And Consequences Of Debt‐Equity Swaps And Defeasances: More Evidence That It Does Not Pay To Manipulate Earnings," Journal of Applied Corporate Finance, Morgan Stanley, vol. 3(3), pages 77-81, September.
    • Handle: RePEc:bla:jacrfn:v:3:y:1990:i:3:p:77-81
    DOI: 10.1111/j.1745-6622.1990.tb00211.x
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