A rational analysis of analyst behavior predicts that analysts immediately and without bias incorporate information into their forecasts. Several studies document analysts' tendency to systematically underreact to information. Underreaction is inconsistent with rationality. Other studies indicate that analysts systematically overreact to new information or that they are systematically optimistic. This study discriminates between these three hypotheses by examining the interaction between the nature of information and the type of reaction by analysts. The evidence indicates that analysts underreact to negative information, but overreact to positive information. These results are consistent with systematic optimism in response to information. THE LITERATURE ON F INANCIAL ANALYSTS defines the phrase "forecast inefficiency" to mean forecasts that fail to accurately incorporate new information on a timely basis and0or that are biased. These forecasts have also been described as irrational or suboptimal. Prior studies report inefficiency in analysts' forecasts, finding that they are upwardly biased and inaccurately ref lect available information. Some studies conclude from this that analysts underreact to information; other studies conclude that analysts overreact. If markets treat analysts' forecasts as both rational and statistically optimal, then inefficient forecasts could have important implications for the efficiency of pricing in securities markets. In this paper, we reexamine the apparent tendency of analysts to misinterpret earnings information. The intent of this study is to discriminate between three hypotheses:~1! that analysts systematically underreact to new earnings information;~2! that analysts systematically overreact to new earnings information; and~3! that analysts are systematically optimistic in their reactions.For hypotheses~1! and~2!, the direction of the misinterpretation~i.e., underor overreaction! is independent of the nature of the information received. In contrast, hypothesis~3! predicts that analysts are optimistic in interpreting

This study examines the nature of post‐transaction restructuring activities for 32 large U.S. corporations that underwent management buyouts between 1983–89. This study (i) provides evidence on the extent and type of divestment and acquisition activities under private ownership; (ii) documents the outcomes associated with MBOs and the longevity of the buyout organization; and (iii) investigates the claim that buyouts are primarily mechanisms for breaking up public corporations and selling the pieces to related acquirers. The balance of the evidence indicates that restoring strategic focus is an essential function of the buyout for these large firms. However, the evidence also indicates that the buyout organization does continue to operate significant parts of the prebuyout firm. By far the majority of firms continue to meet their debt obligations satisfactorily during the buyout phase. Finally, the evidence indicates that asset sales to related acquirers derive more from efficiency considerations than market power.

This article examines the effect of issuing debt with and without "poison put" covenants on outstanding debt and equity claims for the period 1988 to 1989. The analysis shows that "poison put" covenants affect stockholders negatively and outstanding bondholders positively, while debt issued without such covenants has no effect. The study also finds a negative relationship between stock and bond returns for firms issuing poison put debt. These results are consistent with a "mutual interest hypothesis," which suggests that the issuance of poison put debt protects managers and, coincidentally, bondholders, at the expense of stockholders.A CONTRACTUAL INNOVATION, KNOWN generically as "poison puts" or "super poison puts," has been introduced in the corporate bond market in recent years. The two principal covenants devised are put options and coupon adjustments triggered by the occurrence of "risk events" like hostile takeovers, acquisition of large stakes in firms (e.g., 30 percent), leveraged buyouts, and leveraged recapitalizations. One alleged purpose is to insulate managers from the market for corporate control. Alternatively, these covenants could be introduced to shelter bondholders from reductions in bond value that sometimes occur concurrently with corporate control activity. This article examines the effect on bondholder and stockholder wealth of issuing debt with these provisions and draws inferences about the true economic roles that they perform.Section I of the article describes the possible economic roles of event risk covenants and the implications of the issuance of these bonds for the value of the firm's stock and outstanding debt. Section II describes the sample and data used in this study. Section III outlines the methodology for assessing stockholder and bondholder wealth effects. Finally, Section IV presents the results of the empirical tests, and Section V concludes. I. Economic Roles of Event Risk CovenantsEvent risk covenants or "poison puts" could be included in corporate debt for three reasons. First, poison puts, as the name suggests, could be designed to *Cook is from the Financial Institutions Center at the Wharton School, University of Pennsylvania, and Easterwood is from Virginia Polytechnic and State University. We wish to thank Dave Denis, Meir Schneller, Rene Stulz (the editor), and an anonymous referee for helpful comments. We also wish to thank Melissa Neumann of Lehman Brothers for providing bond index data. 1905

No abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. This content downloaded from 128.235.251.160 on Wed, ABSTRACT This article examines the effect of issuing debt with and without "poison put" covenants on outstanding debt and equity claims for the period 1988 to 1989. The analysis shows that "poison put" covenants affect stockholders negatively and outstanding bondholders positively, while debt issued without such covenants has no effect. The study also finds a negative relationship between stock and bond returns for firms issuing poison put debt. These results are consistent with a "mutual interest hypothesis," which suggests that the issuance of poison put debt protects managers and, coincidentally, bondholders, at the expense of stockholders.A CONTRACTUAL INNOVATION, KNOWN generically as "poison puts" or "super poison puts," has been introduced in the corporate bond market in recent years. The two principal covenants devised are put options and coupon adjustments triggered by the occurrence of "risk events" like hostile takeovers, acquisition of large stakes in firms (e.g., 30 percent), leveraged buyouts, and leveraged recapitalizations. One alleged purpose is to insulate managers from the market for corporate control. Alternatively, these covenants could be introduced to shelter bondholders from reductions in bond value that sometimes occur concurrently with corporate control activity. This article examines the effect on bondholder and stockholder wealth of issuing debt with these provisions and draws inferences about the true economic roles that they perform.Section I of the article describes the possible economic roles of event risk covenants and the implications of the issuance of these bonds for the value of the firm's stock and outstanding debt. Section II describes the sample and data used in this study. Section III outlines the methodology for assessing stockholder and bondholder wealth effects. Finally, Section IV presents the results of the empirical tests, and Section V concludes. I. Economic Roles of Event Risk CovenantsEvent risk covenants or "poison puts" could be included in corporate debt for three reasons. First, poison puts, as the name suggests, could be designed to *Cook is from the Financial Institutions Center at the Wharton School, University of Pennsylvania, and Easterwood is from Virginia Polytechnic and State University. We wish to thank Dave Denis, Meir Schneller, Rene Stulz (the editor), and an anonymous referee for helpful comments. We also wish to thank Melissa Neumann of Lehman Brothers for providing bond index data.