Papers Published in Journals

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Papers Published in Journals

The Advance Refunding of Nonredeemable High-Coupon Corporate Debt Through In-Substance Defeasance

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John D. Finnerty, Journal of Financial Engineering, pp. 150-173. 1992 September

Testing Hedge Effectiveness under SFAS 133

SFAS 133, Accounting for Derivative Instruments and Hedging Activities, marked a large step forward in FASB's quest to record financial instruments at fair value. The new accounting for hedges can introduce some complexity into the financial statements that can be avoided if the hedge qualifies as a "highly effective" hedge. Applying the definition of such a hedge, however, is subject to debate. Three common methodologies for testing hedge effectiveness are presented and analyzed: the dollar-offset method, the variability-reduction method, and the regression method. The dollar-offset method, which is more sensitive to small changes, but also stresses the importance of examining all the specifics of the situation, is not recommended. SFAS 133 standardizes the accounting treatment for derivative instruments by requiring all entities to report derivatives as assets and liabilities on the balance sheet at their fair value. A case of a company that is considering hedging a purchase is used to illustrate the methods described.

John D. Finnerty and Dwight Grant, The CPA Journal, pp. 40-47. 2003 April

Stock-for-Debt Swaps and Shareholder Returns

The stock price effects of 113 stock-for-debt swaps that occurred during August 1981-August 1983 are analyzed using the Comparison Period Returns approach. Separate tests on 2 subsamples are performed to determine whether the stock market's reaction to the swap announcement depends upon differences in the characteristics of the swap transaction. The postannouncement behavior of the share prices of the companies in the swap sample is then examined. Analysis reveals that the stock market reacted negatively to the announcement of stock-only-for-debt swap transactions, but that a company's share price ordinarily recovered within a few weeks of the announcement. The stock market's reaction to the announcement of a stock-plus-cash-for-debt swap, on the other hand, was on average roughly neutral. When a swap was followed by a share repurchase and/or a bond refunding transaction, the market impact was positive. The initial negative reaction can be explained in terms of an information effect.

John D. Finnerty, Financial Management, pp. 5-17. 1985 Autumn

Some Suggested Guidelines for Reviewers

Given the importance that the finance profession places on puhlieation in refereed journals, a constructive dialogue on the quality and integrity of the review process is needed. This paper uses an interview format to provide informed opinions and guidance on basic standards for effective reviewing. The final section of the paper presents suggested guidelines for reviewers. The issues covered in the paper should he especially helpful for less experienced authors and reviewers.

John D. Finnerty, Financial Practice and Education, pp. 22-24. 1994 Fall/Winter

Refunding Discounted Debt: A Clarifying Analysis

This paper demonstrates that refunding discounted debt represents a form of tax arbitrage that is profitable to taxpaying corporations when the present value of the additional tax shields, created through the refunding, exceeds the sum of the present value of the overall increase in pre-tax debt service requirements, after-tax transaction costs, and any tax incurred on the gain. The paper contrasts the factors that give rise to profitable opportunities to refund high-coupon debt and discounted debt. it also shows that, of the analytical approaches previously suggested for calculating the net advantage of refunding discounted debt, discounting the change in after-tax debt service payments at the after-tax cost of money for the refunding issue is the only one consistent with preserving debt service parity.

John D. Finnerty, Journal of Financial and Quantitative Analysis, pp. 95-106. 1986 March

Real Money Balances and the Firm's Production Function

A production function incorporating real money balances can be used meaningfully in a model of a firm in which the firm's money capital requirements are to be taken explicitly into account, such as in the Vickers model of the firm. Such a production function cannot be obtained simply by incorporating real money balances in the physical production function; it is, instead, derived from the production function and the existing relations among real money balances, inputs, and output. Mathematical implementation indicates that attributing reasonable properties to the cash balance relation leads to a derived production function which exhibits the familiar properties. It is also mathematically demonstrated that, in general, a firm's expansion path will not be identical with and without cash balances as a factor input; this suggests that the inclusion of cash balances in the production function may be the more appropriate formulation.

John D. Finnerty, Journal of Money, Credit and Banking, pp. 666-671. 1980 November

Range Floaters: Pricing a Bet on the Future Course of Short-Term Interest Rates

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John D. Finnerty, Financier, pp. 20-27. Reprinted in John D. Finnerty and Martin S. Fridson, eds., The Yearbook of Fixed Income Investing 1995. Irwin Professional Publishing, Chicago, 1996, ch. 8. 1994 November

Preferred Stock Refunding Analysis: Synthesis and Extension

The subject of bond refunding has received extensive treatment in the finance literature. A recent study by Finnerty [3] summarizes the bond refunding literature and describes methods of analyzing the refunding of high-coupon debt and low-coupon debt both with and without a sinking fund that are all based on a unified analytical framework which preserves debt service parity.

John D. Finnerty, Financial Management, pp. 22-28. 1984 Autumn

New Issue Dividend Reinvestment Plans and the Cost of Equity Capital

In a new issue dividend reinvestment plan (NIDRP), reinvested dividends are used to buy newly issued shares directly from the sponsoring firm. To a dividend-paying company, the NIDRP is a potentially important source of equity capital. The cost of equity capital raised by way of NIDRP is more than the cost of retention-financed equity capital but less than the cost of stock-financed equity capital when shares are sold through the NIDRP at their market value. A transfer of wealth from nonparticipants to participants results from selling shares through the NIDRP at a discount from market value. When the discount is large enough, the NIDRP-financed equity capital is even more expensive than stock-financed equity capital. In the absence of market imperfections, NIDRPs are not consistent with minimizing a firm's cost of equity capital, but when markets are imperfect, the NIDRP eases "homemade retentions" by shareholder clienteles that prefer a low-payout policy.

John D. Finnerty, Journal of Business Research, pp. 127-139. 1989 March

Measuring the Duration of a Floating-Rate Bond

This paper generalizes the Chance-Morgan procedure for calculating the duration of a floatingrate non-sinking fund bond, developing a computational formula within a discrete time framework that incorporates the sensitivity of the coupon rate index to changes in market interest rates. The formula developed for the duration of a floating bond is expressed in terms of the duration of a fixed-rate but otherwise identical bond. The responsiveness to changes in market interest rates of the index to which the floating-rate bond's coupon rate is tied and the frequency of coupon rate adjustment have a significant impact on the duration of a floating-rate bond.

John D. Finnerty, Journal of Portfolio Management, pp. 67-72. Reprinted in Sanjay K. Nawalkha and Donald R. Chambers, eds., Interest Rate Risk Measurement and Management. Institutional Investor Books, New York, 1999, ch. 32. 1989 Summer