MSU RETURNING MATERIALS: PIace in book drop to LJBRAfiJES remove this checkout from .—:—a- your record. FINES wiH be charged if book is returned after the date stamped be10w. E.» 1 r 4 J‘ I ~Zu t 4;: 3 '0'! Fifi WE 0 ‘7 _ (7/ moo )- ,‘ ‘1' . ANALYSIS OF STOCK MARKET REACTION TO THE EXCHANGE OF DISCOUNTED LONG-TERM CORPORATE BONDS by John Consaul Gardner, Sr. A DISSERTATION Submitted to Michigan State University Department of Finance and Insurance in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY 1983 Copyright by JOHN CONSAUL GARDNER, SR 1983 Ev! . 0: 333333: ABSTRACT ANALYSIS OF STOCK MARKET REACTION TO THE EXCHANGE OF DISCOUNTED LONG-TERM CORPORATE BONDS by John Consaul Gardner, Sr. This research attempts to determine the stock market effects of announcements of bond for bond exchanges and to determine if the effects are directly associated with the cash flows resulting from the exchange. The bond for bond exchange, unlike exchanges between classes of securities, does not alter the firm's capital structure since the market value of debt remains constant. The exchange does, however, result in a coincidental adjustment in net cash flows. A stock market return analysis is conducted on the three days surrounding the announcements of each exchange. These announcements consist of the proposal, terms, and results of the exchange announce- ments. The research assumes a semi-strong form of market efficiency, as it relates to publicly available information, and an equilibrium pricing of common stocks consistent with the capital asset pricing model. Results of the analysis Show significant positive stock returns exist during the proposal announcement period and insignifi- cant returns around the terms and results announcement periods. These results suggest that shareholders impound the economic effects of the exchange when the proposal to exchange the firm's bonds is made. Io t excess r tut correlation evidenced in between the Periods and John Consaul Gardner, Sr. To test the relationship between the relative size of the excess returns and the net cash flows resulting from the exchange, a correlation analysis is performed. Insignificant correlations are evidenced in each of the three announcement periods. Correlations between the excess returns aggregated over the three announcement periods and the cash flows are also insignificant. The lack of correlation between excess returns and cash flows is likely to be caused by either 1) a mis-specification of the cash flow model, or 2) factors other than those incorporated in the cash flow model having an economic impact upon shareholder wealth. Assuming the cash flow model reasonably measures the net present value of an exchange, Jensen and Meckling's agency theory provides an explanation of what these other economic effects might be. In particular, if debt covenents are written in terms of book values of capital structure components, the reduction in long-term debt can pro- vide greater flexibility to managers in terms of dividend decisions, future debt issues, and working capital maintenance. DEDICATION This dissertation is dedicated to my beloved wife Susan. Her emotional stability and mental perseverance contributed immeasurably to the completion of this study. ACKNOWLEDGMENTS I wish to express my gratitude to my dissertation committee of Professor Richard Simonds (chairman), Professor Randall Hayes, and Professor Kelly Price. Their advice and encouragement are sincerely appreciated. I would also like to thank Mark Zmijewski for his helpful comments, Richard Fleischman for his editorial insight and Mrs. Josephine McKenzie for her years of friendship to my family and the typing of this dissertation. A special note of thanks to my parents, John w. and Theresa B. Gardner, for their spiritual and emotional support over the past 35 years. John Consaul Gardner, Sr. May 6, 1983 iv TABLE OF CONTENTS LIST OF TABLES O O O O O O O O O O O O O O O O O 0 LIST OF GRAPHS . . . . . . . . . . . . . . . . . . . . . Chapter I. II. III. INTRODUCTION 0 O O O I O O O O O O O O 0 Background. . . . . . . . . . . . . . . . . NPV and Shareholder Wealth. . . . . . . . . Hypotheses and Methodology - Part I . . . . . Hypotheses and Methodology - Part II. . . Implications for Capital Market Efficiency. Additional Firm Effects . . . . . . . . . . . Contracting Theory Consideration. . . . . . . Rational versus Irrational Investor Theories. Summary . . . . . . . . . . . . . . . . . . Organization of the Study . . . . Footnotes . . . . . . . . . . . . . . . . . . L I TERATURE REV IEW O C O O O O O O I O O O O O 0 Capital Structure Theory - Under Perfect Capital Markets. . . . . . . . . . . . . . . Capital Structure Theory - Relaxing Assumptions . . . . . . . . . . . Empirical Investigations of Capital Structure Theory . . . . . . . . . . . . . . Bond Exchanges - An Investment Decision . . . Cash Flow Models. . . . . . . . . . . . . . Discount Rate . . . . . . . . . . . . . . . . Empirical Tests of Bond Refundings. . . . . . Summary . . . . . . . . . . . . . . . . . . . Footnotes . . . . . . . . . . . . . . . . . . DEBT EXCHANGE FRAMEWORK AND SAMPLE SELECTION. O O I O O O O O O O O O O O O O O O DEBT EXCHANGE FRAMEWORK Bond for Bond Exchange Process. . . . . . . . Reasons for Bond for Bond Exchanges . . . . . Expenses. . . . . . . . . . . . . . . . . . . Corporate Tax Consequences of Exchanges . . Personal Tax Consequences of Exchanges. . . . Success of Exchange Offers. . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . V Page viii \JNO‘L‘WH 10 11 12 13 14 14 15 17 19 23 29 33 35 36 38 Chapter IV . Y1. Chapter IV. V. VI. SAMPLE SELECTION Selection Criteria. . . . . . . . . . . . . . Sample Industries . . . . . . . . . . . . . . Distribution of Sample Over Test Period . . . Announcement Dates . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . Footnotes . . . . . . . . . . . . . . . . . RESEARCH METHODOLOGY. . . . . . . . . . . . . . Theoretical Foundations . . . . . . . . . . Stock Return Methodology. . . . . . . . Theoretical Foundations and the Present Research Design. . . . . . . . . . . Correlation Analysis. . . . . . . . . . . . . NPV Calculation Proposed. . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . Footnotes . . . . . . . . . . . . . . . . . . RESULTS 0 O O O O O O O O O O O O O O O O O O 0 Part 1: STOCK MARKET RETURNS ANALYSIS Distributional Properties of Common Stock Daily Rates of Return. . . . . . . . . . . . Announcement Effects on Common Stock Returns. First Announcement Period . . . . . . . . . . Second Announcement Period. . . . . . . . . . Third Announcement Period . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . Part 2: CORRELATION ANALYSIS First Announcement Period . . . . . . . . . . Second Announcement Period. . . . . . . . . . Third Announcement Period . . . . . . . . . . Aggregated Correlations . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . Footnotes . . . . . . . . . . . . . . . . . . SUMMARY, CONCLUSIONS, RESEARCH CONTRIBUTION AND ADDITIONAL RESEARCH SUGGESTIONS. . . . . . Summary . . . . . . . . . . . . . . . . . . . Conclusions . . . . . . . . . . . . . . . . . Research Contributions. . . . . . . . . . . . Additional Research Suggestions . . . . . . . Footnotes . . . . . . . . . . . . . . . . . . vi Page 88 92 93 101 109 114 120 122 123 124 128 129 131 131 132 135 137 139 APPENDIX Page A 140 B 164 C 208 D 217 BIBLIOGRAPHY..........................227 vii Table II. III. IV. VI. VII. VIII. IX. XI. XII. XIII. XIV O XVI. XVII. XVIII. LIST OF TABLES New Issues Principal Value and Old Issues Market value I O O O O O O O O O O O O O O 0 Individual Firm Announcements . . . . . . . Reasons for Exchanges of Bonds. . . . . . . Expenses of Exchanges . . . . . . . . . . . . 01d Debt Issue Potentially Versus Actually Exchanged. . . . . . . . . . . . . Industries of Sample Firms. . . . . . . . . . Distribution of Exchange Offers Over Time . . Yearly Averages of Corporate Bond Yields. . Firm Specific Time Frames for the EXChange Process. 0 o o o o' o o o o o o o 9 Types of Debt Exchanged . . . . . . . . . . . Changes in Maturity of Debt Exchanged . . . . Information Announced in Each Test Period . . NPV Calculations to be Tested . . . . . . . . Annual Change in After-tax Interest Payments After The Exchange. . . . . . . . . . . . . Principal Values of New and Old Bond Issues . Period 1 Statistics on Firm Returns Mean Returns Model. . . . . . . . . . . . . Period 2 Statistics on Firm Returns - Mean Returns Model. . . . . . . . . . . . . Period 3 Statistics on Firm Returns Mean Returns Model. . . . . . . . . . . . . viii Page 39 42 44 47 53 57 58 58 60 62 63 76 78 81 82 89 9O 91 Table XIX. XXII. XXIII. XXIV. XXVI. XXVII. XXVIII. MIX 0 XXXI. Period 1 Total Firms Average Daily Residuals - Mean Returns Mbdel. . Period 1 Postive/Negative NPV Firms Average Daily Residuals - Mean Returns Model - Actual Exchange Results . . . . . . . Period 1 Positive/Negative NPV Firms Average Daily Residuals - Mean Returns Model - 100% Exchange Results . Period 2 Total Firms Average Daily Residuals — Mean Returns Models . . . . Period 2 Positive/Negative NPV Firms Average Daily Residuals - Mean Returns Model - Actual Exchange Results . . . . . . . . Period 2 Positive/Negative NPV Firms Average Daily Residuals - Mean Returns Model - 100% Exchange Results . . . . . . . . . . . Period 3 Total Firms Average Daily Residuals. Period 3 Positive/Negative NPV Firms Average Daily Residuals - Mean Returns Model - Actual Exchange . . Period 1 Correlations - Mean Returns Model. Period 2 Correlations - Mean Returns Model. Period 3 Correlations - Mean Returns Model. Aggregated Correlations 3 Day CAR's - Mean Returns Model. Aggregated Correlations Mean Returns Model. Page 94 97 99 102 105 107 110 112 121 123 124 126 127 LIST OF GRAPHS Graph Page 1. Period 1 Z-Scores on Average Residuals - Total Portfolio - Mean Returns Model. . . . . . . . . 95 2. Period 1 Cumulative Average Residuals - Total Portfolio - Mean Returns Model. . . . . . . . . 95 3. Period 1 Z-Score on Cumulative Average Residuals - Total Portfolio - Mean Returns Model. . . . . . . . . 95 4. Period 1 Z-Scores on Average Residuals - Positive/Negative NPV Portfolios - Mean Returns Model - Actual Returns . . . . . . . . . 98 5. Period 1 Cumulative Average Residuals - Positive/Negative NPV Portfolios - Mean Returns Model - Actual Returns . . . . . . . . . 98 6. Period 1 Z-Scores on Cumulative Average Residuals - Positive/Negative NPV Portfolios - Mean Returns Model - Actual Returns . . . . . . . . . 98 7. Period 1 Z-Scores on Average Residuals - Positive/Negative NPV Portfolios - Mean Returns Model — 100% Exchange. . . . . . . . . . 100 8. Period 1 Cumulative Average Residuals - Positive/Negative NPV Portfolios - Mean Returns Model - 100% Exchange. . . . . . . . . . 100 9. Period 1 Z-Scores on Cumulative Average Residuals - Positive/Negative Portfolios - Mean Returns Model - 100% Exchange. . . . . . . . . . 100 10. Period 2 Z-Scores on Average Residuals - Total Portfolio - Mean Returns Model. . . . . . . . . 103 11. Period 2 Cumulative Average Residuals - Total Portfolio - Mean Returns Model. . . . . . . . . 103 12. Period 2 Z-Scores on Average Residuals - Total Portfolio - Mean Returns Model. . . . . . . . . 103 Graph Page 13. Period 2 Z-Scores on Average Residuals - Positive/Negative NPV Portfolios - Mean Returns Model - Actual Returns . . . . . . . . . 106 14. Period 2 Cumulative Average Residuals - Positive/Negative NPV Portfolios - Mean Model - Actual Returns . . . . . . . . . . . . . 106 15. Period 2 Z-Scores on Cumulative Average Residuals Positive/Negative NPV Portfolios - Mean Returns Model - Actual Results . . . . . . . . . 106 16. Period 2 Z-Scores on Average Residuals - Positive/Negative NPV Portfolios - Mean Returns Model - 100% Exchange. . . . . . . . . . 108 17. Period 2 Cumulative Average Residuals - Positive/Negative NPV Portfolios - Mean Returns Model - 100% Exchange. . . . . . . . . . 108 18. Period 2 Z-Scores on Cumulative Average Residuals - Positive/Negative Portfolios - Mean Returns Model — 100% Exchange. . . . . . . . . . 108 19. Period 3 Z-Scores on Average Residuals - Total Portfolio - Mean Returns Model. . . . . . . . . 111 20. Period 3 Cumulative Average Residuals - Total Portfolio - Mean Returns Model. . . . . . . . . 111 21. Period 3 Z-Scores on Average Residuals - Total Portfolio - Mean Returns Model. . . . . . . . . 111 22. Period 3 Z-Scores on Average Residuals - Positive/Negative NPV Portfolios - Mean Returns Model - Actual Returns . . . . . . . . . 113 23. Period 3 Cumulative Average Residuals - Positive/Negative NPV Portfolios - Mean Returns Model - Actual Returns . . . . . . . . . 113 24. Period 3 Z-Scores on Cumulative Average Residuals - Positive/Negative NPV Portfolios - Mean Returns Model - Actual Returns . . . . . . . . . 113 25. Combined Three Period Z-Scores on Average Residuals - Total Portfolio - Mean Returns MOdel. . . . . . . . . . . . . . . . . . 117 xi Graph Page 26. Combined Three Period Cumulative Average Residuals - Total Portfolio - Mean Returns MOdel. . . . . . . . . . . . . . . . . . 117 27. Combined Three Period Z-Scores on Cumulative Average Residuals - Total Portfolio - Mean Returns Model. . . . . . . . . . . . . . . . . . 117 xii LIST OF EXHIBITS Exhibit Page 1. IRS Rules on Bond Refundings. . . . . . . . . . . . . . 51 2. NPV Calculation Example . . . . . . . . . . . . . . . . 84 xiii CHAPTER I INTRODUCTION Background Changes in capital structures resulting from corporations ex- changing two classes of their own securities have recently been studied to determine any effect on the wealth of the respective secu- rity holders. Two recent studies by Masulis [1980] and Mikkelson [1981] analyzed exchanges between various classes of securities.1 Central to their analysis was the assumption that the exchanges of securities between different classes of security holders represented "pure" capital structure changes. "Pure" capital structure changes occur when the ex- change is not confounded by changes in a firm's asset composition or any other simultaneous cash inflows or outflows.2 The results of their empirical investigations were consistent with Modigliani-Miller [1963] in that a relationship appeared to exist between resultant increases (decreases) in tax shield caused by the exchange and increases (decreases) in shareholder wealth.3 A separate body of research exists which deals with exchanges within a class of securities, i.e., debt for debt exchanges. This literature proposes no capital structure effect on shareholder wealth since the market values of the two debt issues in the exchange are approximately equal.4 Analysis of the effects of bond for bond 2 exchanges has focused on the impact of the net cash flows generated by the exchange upon shareholder wealth. The majority of the extant literature dealing with the net cash flow impact of corporate bond refundings was concerned with the replacement of higher interest rate debt with lower rate new issues. This research focused upon the issuer's trade-off between higher new bond principal amounts and lower interest costs. Authors sudh as Bierman [1966, 1972], Bowling [1966], Schwartz [1967] and weingartner [1967] have contributed research in this area. A second form of bond exchanges, exchanges of discounted long- term corporate bonds, occurs in high interest rate periods. During the 1970's, when interest rates were historically high and a large volume of corporate debt financing prevailed, a number of new issues were exchanged for outstanding lower coupon rate bonds. Analysis of the net cash flows generated by these exchanges focused upon the issuer's trade-off between lower new bond principal amounts and higher interest costs. Research related to the investment aspects of the exchange decision was conducted by Ang [1975], Johnson and Klein [1974], Kalotay [1978] and Laber [1978]. Each of these authors addressed the capital budgeting consideration of bond exchanges. The cash flow models proposed by these authors will be considered separately in Chapter II. The purpose of this study is to test for the information con- tent of the announcements of the exchanging of discounted corporate bonds. Bond exchanges that occurred over the years 1973 through 1979 *will be included in the study. In addition, proposed cash flows resulting from the bond exchanges will be investigated separately to bene web u I 3 determine if a relationship exists between shifts in shareholder wealth and the net cash flow of the exchange. The proposed cash flow effect on shareholder wealth is discussed in the section to follow. NPV and Shareholder Wealth The effect of the exchange on shareholder wealth, assuming all benefits accrue to the common shareholder, can be modeled as follows: Assuming no exchange, the share price equals P + D P0 = -—]—'——l 0 (Eq. 1) 1 + r Adding the exchange at to and separating the NPV from P1’ we have P1 + D1 NPVo NPVo P! = __ + = P0 + ’ (Eq. 2) 1 + r S S o o where: P - current stock price, Pl - expected stock price at the end of period one without exchange, D - expected dividend at the end of period one, 1 NPVo - net present value of the exchange, 80 - number of shares of common stock outstanding, r I rate of return required by common shareholders, P' = current stock price which includes any wealth effect from the exchange, t 8 current time period, and therefore NPV P'-P = O o o '3 APO ° (Eq. 3) ‘O The effect on the market value of common stock would be o = 0 (Eq. 4) 4 The proposed change in stock market value due to the exchange is what this research will be investigating. The hypotheses to be tested and the associated research methodology applied will be divided into two distinct parts. Hypotheses and Methodology — Part 1 The first phase of the research will examine the effect on shareholder wealth caused by the announcement of the exchange. Rele- vant announcement dates are those dates on which new information con- cerning the exchange is first released to the market. For bond ex- changes the proposed relevant dates are: l. The initial announcement of the firm's proposed exchange, 2. Announcement of the term of the bond exchange, and 3. Announcement of the final results of the exchange. The announcement process normally involves several additional interim results announcements and time extensions of the exchange. Most firms in the sample studied made two or more announcements of results or extensions. Chapter III contains an in-depth discussion of the ex- Change process. The hypotheses to be tested are: 1. Initial Announcement Hypothesis AP 1: Ho ' P 1 = O - No significant changes in common stock t1 prices of exchanging firms is due to the announcement of the exchange decision (t ). APt 1 HJ. : —P—-1- 5‘ 0 - A significant change in common stock t1 prices of exchanging firms is due to the announcement of the exchange decision (t ). l 5 2. Terms Announcement Hypothesis AP t B0 = 0 - No significant change in common stock t2 prices of exchanging firms is due to the announcement of the terms of exchange (t2). APt2 H1 : -§—-# 0 - A significant change in common stock t2 prices of exchanging firms is due to the announcement of the terms of exchange (t2). 3. Results Announcement Hypothesis APt Ho . P a 0 - No significant change in common stock t3 prices of exchanging firms is due to the announcement of results of the exchange (t3). A Pt3 H1 : —§——-f 0 - A significant change in common stock t3 prices of exchanging firms is due to the announcement of results of the exchange (:3). The above hypotheses relate to any change in shareholder wealth reflected in price changes at the initial announcement date (Ptl), the announcement of terms date (Pt ) and the final results announcement (Pt3)' An excess returns analysis, discussed thoroughly in Chapter IV, ‘will be conducted using the mean adjusted returns model as an estima- tion model.5 Z-tests will be conducted on daily mean returns of the sample around the announcement periods. If significant excess returns are detected around any of the announcement dates, the significant periods will be further analyzed to determine the relationship of a proposed NPV calculation to these returns. This will be accomplished in Part II. Hypotheses and Methodology - Part II Given the excess returns determined in Part I, correlation analysis, similar to that conducted by Beaver, Clarke and Wright [1979], will be performed to investigate the relationship between the rela- tive magnitudes of the individual firm's excess returns and the firm's standardized net present value. The hypothesis to be tested is: H0 : Prn S 0 The abnormal returns of the individual common stocks of exchanging firms are not positively correlated with the standardized net present values of the bond exchanges. H1 p >0 rn The abnormal returns of the individual common stocks of exchanging firms are positively correlated with the standard- ized net present values of the bond. where 0 8 correlation factor R = excess returns N = standardized NPV calculation Assuming R and N are jointly drawn from the same distribution, the correlation factor will measure the level of dependence between the two variables. The two variables are the individual excess returns and the standardized NPV calculation. The standardization procedure involves a division of the NPV by the average value of the firm's common stock over the five trading days prior to the announcement date. Chapter IV provides an in-depth discussion of research methodology employed. 7 Based upon empirical results obtained by Masulis [1980], come mon stock returns of exchanging firms would be expected to be most affected at the time of the initial announcement. This implies in- vestors can sufficiently forecast the cash flow impact of the exchange without waiting to learn the actual terms of the exchange. Investors can essentially impute the terms of exchange based upon current economic conditions. Implications for Capital Market Efficiency The analysis of the exchange process will be an examination of the semi—strong market efficiency hypothesis. By investigating daily return data around the announcement dates, a determination of how rapidly the information is incorporated in share prices can be examined. Any lagged effect might be considered as an indication of market ineffi- ciency. Results may be confounded by the presence of insider informa- tion,as well as any signalling that the exchange itself might convey to security holders. In addition, a concomitant effect due to a change in expected bankruptcy costs and any effect of incomplete capital markets may confound the results. The analysis of these issues, however, is beyond the scope of the research conducted here. Possible inferences will be discussed when empirical results are reviewed in Chapter V. Additional Firm Effects While the proposed cash flow generated by the exchange is of economic consequence and is the focal point of this research, other firm specific variables are affected by the exchange process. As pointed out by Johnson and Klein [1974], additional consequences of 8 the exchange would be the improvement of the firms financial ratios and the effect on current earnings. Selected financial ratios affected by the exchange would in— clude profitability and debt utilization ratios. Profitability ratios such as profit margin, return on investment and return on equity are affected in the year of repurChase. Income would be inflated by the gain on retirement of the old bonds.6 The inflated income number results in an inflated numerator in the profitability ratios making them more attractive.7 This enhancement of profitability would be of a one period duration after which they would revert to normal levels. The new ratio levels may in fact ultimately fall below pre-exchange levels due to additional interest payments on the new bond issue. With debt utilization ratios, the reduction of outstanding debt will improve comparative debt ratios,such as debt to total assets and debt to equity. Other utilization ratios like the times interest earned ratio would normally improve in the year of refund due to the gain on the retirement but may decline in subsequent periods depending upon the increase in yearly interest payments and continued income generation.8 The actual increase in interest payments may, in fact, be quite small, its magnitude depending upon the reduction in prin— cipal versus the increase in the stated interest rate. The effect of the exchange on current earnings has changed with modifications in the generally accepted accounting principles (GAAP). Little attention has been devoted to gains on retirement of discounted bonds until Paton and Paton [1955] presented a discussion on its possibility of occurrence. ARB #43 issued in 1953, as well as contemporary literature of the time, was devoted mainly to refunding in periods of lower interest rates. ARB #43 recommended the amorti- zation of gains or losses on retirement over the remainder of the retired issuée life. A direct write-off to income or retained earn- ings was also acceptable. Effective January 1, 1973, APBO #26 required recognition of gains or losses in income in the period of debt extinguishment and separate identification. With Opinion #26, amortization of gains and losses to future periods was discontinued and APBO#9 (Reporting Results of Operations) was relied upon to determine whether these items should be reported as ordinary or extraordinary. In compliance with APBO #9. they were reported as extraordinary items. Effective September 30, 1973,APBO #30 was issued to supercede Opinion #9. The scope of the extraordinary items classification was drastically reduced and, in doing so, gains and losses on debt extin- guishment became ordinary income items. In 1975, due to pressures from the accounting profession and especially the Securities and Exchange Commission, the Financial Accounting Standards Board issued FAS #4 requiring firms to include gains or losses on all extinguishments of debt occurring after March 31, l975,as an extraordinary item in the income statement. Retroactive application of FAS #4 was encouraged but not required. In summary, for reporting periods ending before April 1, 1975, firms could report gains or losses on repurchases of bonds as ordinary income. In the case of refunding discounted bonds, income and earnings per share figures would be inflated by the gain. For reporting periods ending after April 1, 1975,gains on retirement of discounted bonds are reported as extraordinary items. This research includes the 10 years 1973 through 1979, which means both methods of reporting were used by firms constituting this sample. While this research does not address any possible difference attributable to the form of income classification, several authors have researched this issue. Gonedes [1975] found shareholder wealth was not affected by the form of classification while Eskew and Wright [1976] did find a relationship. This study deals with the exchange announcements, however, and not with the resultant financial reporting. Future research will be conducted to clarify the reporting issue. Contractinngheory Consideration As pointed out by Holthausen [1981], Leftwich [1981, 1983] and others, corporate lending agreement restrictions are usually based in some manner on generally accepted accounting principles (GAAP). These restrictions are written to protect the interests of bondholders since decisions managers may make to maximize the value of stockholder wealth may also reduce the wealth of bondholders. Jensen and Meckling [1976] discuss the existence of the potential conflict between classes of security holders and the associated "bonding costs" resulting in protec- tive covenants.9 Incurrence of these costs acts to reduce the potential conflict between stockholders and bondholders. Restrictions imposed and normally monitored using GAAP include dividend payments, additional debt insurance, maintenance of working capital and merger activities, among others . As delineated above, the exchange of discounted bonds results in improvements in some firm-specific financial variables. If cove- nants are based upon accounting numbers, the exchange can provide 11 greater flexibility to managers in regard to decisions concerning divi- dends, additional debt issues and working capital maintenance. This in turn could result in a shift in wealth from the bondholder to the stockholder, in which case a positive return on equity securities would be expected. This issue will be addressed when the results are evaluated in Chapter V. Rational Versus Irrational Investor Theories As proposed by Collins, Rozeff and Dhaliwal [l98l],theories of stock price behavior can be divided into irrational investor (i.e., disregard for real cash flows) and rational investor (i.e., valuing real cash flows using valuation models). The irrational investor theory assumes investors value the firm according to the accounting numbers provided. In other words, the investor does not "look through" the accounting numbers, i.e., their cash flow implications. In terms of this study, the irrational investor theory would predict a possible shift in shareholder wealth due to the exchangeh effect upon book value financial ratios and the reported accounting gain (both discussed above). This author assumes a rational investor theory applies to shareholder valuation and price changes are caused by a change in expected cash flows or a change in the discount rate used to discount the future cash flows.10 There- fore, the cash flow model proposed in Chapter IV will be used to esti- mate the impact of the exchange on the value of the firm. Summary The bond for bond exchange provides a theoretical opportunity to examine an investment cash flow in a market setting without the 12 confounding effects of an associated adjustment in capital structure. The refund announcement dates will be tested for abnormal returns to detect the effect upon shareholder wealth. These excess returns will then be compared to a standardized net present value of the exchange to determine whether a direct association exists. This form of analysis assumes shareholders are rational investors and therefore value securities according to the discounted value of their cash flows. Organization of the Study In Chapter II a review of the relevant literature will be pre- sented. Since a major justification for conducting this study concerns capital structure theory and related empirical investigations, these topics will be addressed first. Next,the theoretical and empirical literature relating to the investment principles will be reviewed. Chapter 111 contains a discussion of the debt exchange framework. Included in this is a discussion of the legal requirements of debt exchanges and the effects on the firm and bondholders. In addition, the criteria used to select the sample for this study will be addressed. In Chapter IV the research methodology to be used in this study will be reviewed. Chapter V will present the results generated from the research methodology and Chapter VI will discuss these results and subsequent conclusions drawn. 10. 13 Chapter I - Footnotes Masulis [1980] investigated announcements of (l) exchanges of debt with outstanding common stock, (2) exchanges of preferred stock with outstanding common stock and (3) exchanges of debt with outstanding preferred stock. Mikkelson [1981] investigated called convertible bonds, i.e., forced conversions of debt for common stock. Non-"pure" capital structure changes would be those that will also affect the firmb asset structure simultaneously. For example, a new issue of stock includes a cash inflow whereas repurchasing bonds requires a cash outflow. Masulis also related the announcements effect on security returns to a wealth distribution effect. His findings were consistent with both the interest tax shield and wealth distribution hypotheses. See Modigliani-Miller [1958] and Fama-Miller [1972]. Both Masulis and Mikkelson used the mean adjusted returns model in their analyses. This study will also use the market model for comparative purposes. The accounting gain on the bond exchange is equal to the savings in principal less (plus) any unamortized discount (premium) on the repurchased debt. Inflated profitability ratios apply to refunds before 1975 when the gain was reported as ordinary income. Since 1975 the gain has been reported as an extraordinary item. Coverage ratios normally exclude extraordinary items. Therefore, the effect of the exchange on the coverage ratio depends on how the gain was treated, i.e., as ordinary income prior to 1975 and as an extraordinary item since 1975. Bonding costs include audits by public accountants, bonding against manager malfeasance and contractual limitations on manager's decision-making power. See Collins, Rozeff and Dhaliwal [1981] for a complete discussion of rational verses irrational investment behavior. CHAPTER II LITERATURE REVIEW The following is a review of the literature that constitutes the theoretical basis of this study. The literature pertaining to capital structure will be reviewed first since the investigation of bond exchanges is dependent upon stability in relationships between classes of securities in the capital structure. Next, a review of literature relating bond exchanges to investment principles will be presented. This review includes a discussion of proposed cash flow models used to symbolize these proposed investment relationships. Literature concerning alternative discount rates to be used in these cash flow models will also be presented. Finally, empirical studies will be reviewed that attempted to test for the proposed investment relationships. Capital Structure Theory - Under Perfect Capital Markets Capital structure theory attempts to explain the relationship between firm value and the composition of its capital structure. Modigliani and Miller [1958], under limiting assumptions including riskless debt1 and perfect capital markets, demonstrate that the value of the firm is independent of its capital structure composition. M & M contend that, given two firms in the same risk class and varying only in their capital composition, arbitrage forces will prevent the 14 15 assignment of different values to the two firms. The irrelevance of capital structure proposition was supported by additional researchers employing different models. Some of these studies include Hirshleifer [1966, 1970], Robicheck and Myers [1966], and Stiglitz [1969] Who used time-state preference models, and Hamada [1969] and Rubinstein [1973] who used modern portfolio theory to derive the capital struc- ture irrelevance argument. Capital Structure Theory - Relaxinngssumptions Subsequent theoretical investigations pertained to the appropri- ateness of a perfect capital market assumption. Modigliani and Miller [1963] introduced corporate taxes into their analysis and concluded that the tax deductibility of interest payments increases the attrac- tiveness of issuing debt. This implies that increasing the tax shield by incorporating more debt into the capital structure would result in an increase in value to one or more classes of security holders. Miller [1977] revised this conclusion with the introduction of personal taxation. He showed that the inclusion of differential personal tax- ation, where the marginal rate of taxation on interest payments is higher than the capital gains tax rate, could affect the investment behavior of security holders. He concludes that equilibrium can exist in a perfect capital market where both corporate and differential per- sonal tax rates exist if debt policy has no effect on firm value. This means the beneficial tax shield effect of interest payments would be perfectly offset by the negative effect of differential personal tax rates. DeAngelo and Masulis [1979] go on to show that differential personal tax rates do not totally offset the tax shield advantage of l6 debt. However, this benefit may increase at a decreasing rate when bankruptcy costs are included.2 The inclusion of expected bankruptcy costs is another possible counteractive factor that may offset the potentially beneficial tax- shield effect of interest payments. Baxter [1967], Kraus and Litzenberger [1973] and Scott [1976] reviewed increases in the prob- ability of incurring bankruptcy costs due to increased leverage. The general conclusion was that a high degree of leverage increases the probability of incurring bankruptcy costs by increasing the riskiness of the overall earnings stream of the firm. Therefore, other things being equal, an abundance of debt can cause the total value of the firm to fall. Expected costs associated with bankruptcy and reorganization include court costs, manager's time, legal and accounting fees and business disruption costs. These costs would not be incurred by highly levered firms who engage in a voluntary recapitalization. Recapitalization costs are or include the costs of the exchange offer. Warner [1976] estimates the costs of bankruptcy and indicates their relative size in relation to firm value is small.3 In summary, the foundations of capital structure theory are inconclusive in regard to the composition of securities that maximize the value of the firm. While inclusion of debt increases the tax shield on interest payments (implying an all debt capital structure maximizes firm value), other factors such as personal taxes and bank- ruptcy costs confound the implied advantage of debt. 17 Empirical Investigations of Capital Structure Theory Masulis [1980] empirically investigated the impact of capital structure change on the values of firm's securities. He analyzed announcements of "pure" capital structure changes, i.e., exchanges be- tween common stock, preferred stock and debt, and finds statistically significant effects on the returns of these securities. The signifi- cant results provide evidence of a relationship between an increase in shareholder wealth with the increase in corporate tax shield from the exchange. The results are also consistent with proposed wealth redis— tribution effects between classes of security holders. The results provide no evidence, however, regarding any association between changes in shareholder wealth and changes in the probability of bankruptcy. Masulis's sample consisted of 163 exchanges in which there were 85 debt for common, 43 preferred for common and 43 debt for preferred exchange offers. Using the mean adjusted returns model for estimating betas, Masulis looked at the portfolio returns for these securities and conducted t-tests on the excess residuals over the two day period (t=0 and t=l) of the announcement. Significant results and a direct relationship to the change in interest tax shield was proposed. No tax shield effect was found during the announcement of preferred for common exchanges which substantiated the existence of a positive rela- tionship between tax shield on debt and common stock returns. Masulis also analyzed bond and preferred stock return data and discovered offsetting price adjustments occurred (as compared to the common stock for which they were exchanged) with. the capital structure change. These results were consistent with his wealth redistribution hypothesis which predicts offsetting price changes in the individual classes of 18 securities of the firm and no change in total firm value. Implications of agency theory are also recognized in the Masulis study. The empirical results suggest in cases where firms de- crease leverage stockholders'wealth is not being maximized. This would be consistent with agency theory if management reduced debt to avoid bankruptcy and thereby maximize the value of their personal labor con- tracts. As Masulis concludes, the exchange decision "may or may not be consistent with maximizing the firm's net present value,"4 a proposi- tion this research addresses. His results are consistent with the proposition that the positive effects on stock returns associated with increased leverage are larger than the expected costs of bankruptcy. Mikkelson [1981] extends the work of Masulis to include called convertible securities. He uses a similar research methodology, including estimating betas with the mean adjusted returns model and conducting t-tests using equity returns over the announcement period. Mikkelson finds a significant reduction in stock prices over the two (2) day announcement period of convertible debt calls but no sig- nificant effect when convertible preferred was called. These results, like those of Masulis, support the hypothesis of a tax shield effect. These findings are consistent with Modigliani and Miller [1963] as they show an association between changes in debt and changes in stockholder wealth. This conclusion is reinforced by the fact that no shift in stockholder wealth was detected when convertible preferred stock calls were analyzed by Mikkelson and when preferred stock was exchanged for common by Masulis.5 19 Bond Exchanges - An Investment Decision Laber [1979] states, "Managers doubtless weigh many factors in making capital structure decisions and apparently find other consider- ations to be more important than tax shields . . . since refinancing costs are incurred, the investment portion of the decision probably was a separate concern." Both Masulis and Mikkelson assume the observed security reactions are related to tax shield and associated wealth re- distribution effects. Their conclusions may be invalid if the results are confounded by the investment decision.6 Bond for bond exchanges provide an opportunity to test for an investment effect on shareholder wealth since the market value of the firm's debt remains essentially the same before and after the exchange. Research related to the invest- ment decision aspects of bond exchanges is divided between (1) specifi- cation of the impact of refunding on shareholder wealth and (2) determin- ation of an appropriate discount rate. The shareholder wealth impact of bond exchanges can be further sub-divided between the derivation of capital structure relationships from Modigliani and Miller propositions and cash flow models. First, research concerned with the Medigliani and Miller capital structure propositions and their relationship to the investment aspect of bond exchanges will be discussed. Studies by Yawitz and Anderson [1977], Laber [1979] and Livingston [1979] have contributed to this area of research. This will be followed by studies that have focused on modeling the cash flows of the bond exchange. The chapter will con- clude with a review of the literature concerned with the determination of an appropriate rate to discount these cash flows. 20 Yawitz and Anderson Yawitz and Anderson [1977] (Y&A) view the refunding decision related to premium bonds by dividing the decision between a pure lever- age and a pure refunding decision.7 With the aid of a one period model derived from Modigliani and Miller [l958],they address the question of how much debt to re-issue after refunding the old bond (leverage decision). Y & A derive a one period capital structure model and conclude that "only by issuing bonds having the same total coupon as the original debt can the firm retain its original financial leverage and not alter the income distribution available for the equity holders." This ”pure" refunding maintains the distribution of future income, net of refunding costs, to shareholders at the pre-refunding expected value and variance. For premium bonds: AER = L1,n - (l-T)(C+U) (Eq. 5) where L = market value of n - maturity bond L 8 par value of L1,n 2 U = refunding costs T = tax rate C = call price of bonds E = equity value prior to drop in market rates If no transaction costs are involved (U = 0) and the bond is called at its book value, the above equation reduces to: 21 This result assumes T does not affect the transaction. These assump- tions effectively eliminate any investment decision implications of the refund. The pure refunding case, given their assumptions, result in AER = 0, i.e., no leverage effect on stockholder wealth. Once an appropriate level of new debt is determined,Y & A address the subject of a suitable discount rate (refunding decision). Evaluation of the appropriate discount rate assumes the firm has altered its financial risk and accrues the benefits of refunding as a reduction in future interest obligations. Under these assumptions Yawitz and Anderson show that in other than the perpetuity case, after tax future interest obligations should be discounted by the pre-tax rate on debt.8 This holds for callable bonds where "the refunding is conceptually equivalent to the bondholders 'giving up' a portion of their bonds to the equity holders in exchange for the removal of the call feature." Although Yawitz and Anderson deal with refunds of premium bonds,the conclusions they reach are applicable to evaluation of the discounted bond refund decision. Resulting comments to Yawitz and Anderson's research were forwarded by Laber [1979] and Livingston [1979]. Laber Laber argues that Y & A's condition of "pure refunding" was restrictive and their decision rules for "pure" or non—pure refundings are unnecessarily complex. Laber re-evaluates Yawitz and Anderson's conclusion in terms of a hybrid Modigliani and Miller valuation model developed by Ofer and Taggart [1977]. They develop the following model: (l-t)(iZ-il)L2 +-tAL2> (l-t)RC (Eq. 7) 11 22 where: t tax rate i2 = interest rate on old bonds 9. II 1 interest rate on new bonds E n cost of refunding L2 8 par of outstanding bonds which, if realized, would result in an increase in shareolder wealth. The first term relates the benefit associated with the investment deci- sion while the second represents the effect of capital structure change. If the sum of these two terms is greater than the cost of re- funding, shareholder wealth is increased. They go on to show that this model is essentially the same as that proposed by Yawitz and Anderson for "pure" refunding and consistent with their model when mixed refunds are evaluated. Laber's model draws attention to the prospect of in- vestment decision criteria other than tax shields on interest being an integral part of a decision that combines investment and capital structure considerations. Livingston Miles Livingston [1979] also commented on Y and A's derivation. He argues that Y and A should have compared "stockholder wealth after refunding with stockholder wealth after the change in interest rates" to separate the impact of the refund due to an interest rate change with that of the refunding itself. In addition, he shows that given the M and M framework requires certainty of interest rates, it is in- correct to use this framework to evaluate the refunding decision where interest rate uncertainty exists. Yawitz and Anderson [1979] reply by demonstrating the refunding should be evaluated under the constraint of equating the firms capital structure after the refunding 23 to that of the firm if the calls were allowed to expire (premium bonds). This assumption, if utilized, effectively negates Livingston's conclusion since he assumes the value after the call expires equals the par value of the debt (L2) instead of the market value of the bond (L ). l,n In response to Laber, Y and A attack his assumption that to maintain constant leverage requires the market value of debt to remain constant. Y and A assume "constancy of contractual liabilities" which would not result in a negative effect from a reduction in the tax shield. The relevancy of each argument is dependent upon the reader's willingness to accept the alternative assumptions. In relation to this study, Laber's assumptions are consistent with evidence found in ex- changes of discounted bonds. In particular, the contractual liabili- ties do not remain constant as was also the case in both Masulis and Mikkelson's research. An additional implication to this study is the theoretical concern over the combined effect (i.e.,investment versus capital structure) that potentially results in a stockholder wealth adjustment. Cash Flow Models Cash flow models were developed by Ang [1975], Bowling [1966], Johnson and Klein [1974], Kalatoy [1978], Laber [1978], Sibley [1974] and Loy and Toole [1980]. All models were essentially equivalent except for the assumptions made by the particular author. Each model addressed the capital budgeting facets of bond repurchases or exchanges at a discount and/or premium. The models proposed, however, were 24 either general in nature, did not incorporate tax considerations, dealt directly with cash repurchases and/or assumed a coincidental maturity date for both issues. A model is presented in Chapter IV that incorporates cash flows relating specifically to discounted bond exchanges. This proposed model is assumed to be a reasonable estimate of the cash flows associated with the exchange and not necessarily a theoretically flawless model.9 Johnson and Klein Johnson and Klein promote three reasons a firm might refund discounted bonds: 1) increase reported earnings, 2) enhance financial ratios and 3) a positive cashflow. Their cashflow model is: 2n l/2(Io-Ia)(l—TR) Po - Pa 2m 1/2Dt(TR) NPV= z + - E —— E .8 i=1 (:L+r/2)i (1+r/2)2n t=1 (l+r/2)t (q ) where: I and I = annual interest payments on old and o a new bonds respectively P and P = principal payments on old and new 0 a bonds respectively marginal tax rate a remaining years to maturity of bonds 8:3; 8 number of years a reduction in depre- ciation is realized r/2 = semi-annual after-tax discount rate Dt 8 annual depreciation reduction. Johnson and Klein assume coincidental maturity of the two bond issues, semi-annual interest payments, the firm uses its gain from the refund to write down the depreciable value of its assets for tax purposes, the after-tax discount rate is the appropriate rate and refunding expenditures are immaterial and not included. As discussed in Chapter 25 IV actual bond exchanges are not consistent with most of these assumptions. Ans Ang's model for discounted bonds:10 P(rom)- P(r m,r',d) T (7R - R ) S O t t o t T — 2 -_——__——7f— -- ——————1f > 0 (Eq. 9) (1+rt) i=1 (1+rt) (1+rt) where: P(rom) = initial price of existing bonds P(rom,rt,d) = market price of existing bonds with a current market yield of rt and d periods to maturity S = refunding costs P(rom,rt,d) + St y = = ratio of value S at P(rom) issue of new and existing bonds Rt and R0 a coupon rates on new and old bonds respectively. The Y is simply an adjustment to the coupon rate in calculating interest payments which takes into account the change in principal amounts. This model is similar to Johnson and Klein's except it incorporates refunding costs (including the gain on refunding),11 no interest rate payment assumption, no tax treatment assumption for the gain, and use of a before tax borrowing rate for discounting cash flows. Ang also evaluates a model for premium bonds. He concludes that bond refunds can have positive cash flows regardless of whether they are premium or discount bonds. An implication resulting from this conclusion is that management's decision to issue debt may not be substantially affected by interest rate levels. This implication V‘P‘ . 26 is somewhat contrary to intuitive thinking, especially in light of the fact that premium bonds have been given far greater emphasis in the financial literature. Laber's cash flow model is essentially the same as Johnson and Klein's with the exception of using a before-tax discount rate and his consideration (fl? financing costs. Laber concludes, however, that positive NPV's are unlikely and therefore managers appear to refund discounted bonds because of paper gains and/or enhanced financial ratios. This conjecture has not been supported empirically and will be addressed in this research design. Ofer and Taggart Ofer and Taggart evaluate the bond refunding in an M and M valu- ation framework and incorporate present value considerations. They derive decision rules: RC(1-T) < (1")if'r')D (Eq. 10) and: (l-T)(r-r')D RC(l-I) < r'(l-T) (Eq. 11) where: RC = tax deductible cost of refunding T = tax rate old and new interest rates on debt respectively '1 U H I U ll par value of debt The difference between the two decision rules is the discount rate used to determine the present value of the change in interest payments. Notice the models assume the size Of debt remains constant, otherwise an additional term representing the change in principal would be 27 required. The first rule is applicable to an equity-financed refunding while the second represents a debt-financed refunding. The discount rate is adjusted for taxes due to the deductibility of the financing bonds'interest. The conclusion drawn from their decision rules is that the appropriate discount rate to use in the present value calculation depends upon how the refunding is financed and how debt capacity is measured.12 Kalotay Kalotay's model is one of the most comprehensive: (Eq. 12) n (1-t)i NPV = - p + z 0 , + j=l [1+(1-e)1]J [1+(1-e)1]n k=0 1 _ m t(l-p) 1 “+1 [l+(l—t)i]k - (1-t)e where: lst term = purchase price 2nd term = discounted interest payments 3rd term = discounted principal payment 4th term = tax obligation associated with the gain l-p 5th term miscellaneous refunding expenses Kalotoy is not concerned with a "correct" discount rate, although he uses the after-tax marginal cost of debt. After going through an ex- ample of an actual refund (Grumman Corp.),he concludes that the firm must be a taxable entity for the refunding operation to be profitable. In this study all sample firms are taxable entities. Loy and Toole Loy and Toole [1980] have developed the most recent and rela- tively extensive net present value calculation for exchange of dis- 28 counted bonds: R R N N x R x N M (l-t) [c P.-c P. M (l-t) [c - c .] NPv=-I+E 3. 3+2 ¢l.¢3 ° i=1 (1+k/2)J j=l (l+k/2)J (Eq. 13) N N R R + (PM+¢M)- (PM'H'M) - #3) Tj (l+k/2)M j=o (1+k/2)J where: IO = initial investment outlay for refunding expenses M = number of semiannual periods of financing horizon = a semiannual interest period the marginal federal income tax rate Znt-I- II c ,c 8 semiannual coupon rate, old and new bond issue, respectively PB,P§ = outstanding principal amount in period j, old J and new bond issue, respectively 4?,dg = outstanding principal amount in period j for assumed refinancing of all principal payments between period 0 and j on the old and new bond iSsues, respectively D = number of semiannual periods over which the tax expense on the early debt extinguishment is realized T. 8 the semiannual tax expense on the early debt extinguishment c - semiannual yield to maturity on the new bond issue k/2 = semiannual, before-tax, risk-adjusted discount rate which equals cx The Loy and Toole model is essentially the same as other models pre- sented. They use the before-tax rate of debt on the new bond issue and in the third term allow for sinking fund payments. The sinking fund factor results in the same present value as the normal assumption 29 of a balloon payment since the reinvestment rate for both is the dis- count (new debt) rate. To summarize, a number of cash flow models have been forwarded with varying assumptions relating to each. Most, however, have dealt with the refunding of premium bonds. Those dealing with discounted bonds are generally consistent with the model proposed in this study but are limited by their assumption(s) of no tax, a cash repurchase of the bonds or a coincidental maturity date for both bond issues. Discount Rate Three different discount rates have been proposed as appropri- ate in evaluating the refunding of discounted bonds: 1. the firm's cost of capital 2. the firm's before-tax cost of debt 3. the firm's after-tax cost of debt In general, since Bowlin's [1966] paper advocating the cost of debt as the appropriate discount rate, use of the firm's cost of capital for bond refunds has been deemed inappropriate by subsequent authors.13 Bowlin argued that the firm's cost of capital includes a risk premium related to the uncertainty associated with future cash flows from assets. Cash flows connected to the refunding decision are generally certain in nature. The only risk associated with the refunding deci- sion is default risk related to the new bond issue. This default risk on principal and interest payments is embodied within the rate of interest on debt. Therefore, a suitable discount rate would be less than the firm's cost of capital, i.e.,the before or after-tax cost of debt. 30 Arguments advocating the use of a before-tax rate of interest on new debt to discount the refunding cash flows were developed by Bierman [1972] and Gordon [1974]. These arguments relate to opportunity costs of the funds used in refunding. Since an investor can receive the before-tax rate of interest if he acquires the bonds directly, it is argued the before-tax rate of interest is the opportunity cost and appropriate discount rate. Bierman Bierman's purpose was to develop a procedure to bypass the question of the appropriate discount rate. Bierman first formu- lates the present values of current debt discounted by current bond yields. The net benefits: V = P - (C + B) (Eq. 14) where: P = amount of bonds issued C - transactions costs B 8 cash outflows of debt He assumes the NPV's of debt before and after the refund remain the same. Bierman then assumes the same maturity amount of debt. This keeps the liability the same before and after the refund and the interest payments and initial outlay different. The net benefits: * = _ * _ V (I I ) An/r C (Eq. 15) where: I a current interest payment 1* 8 interest on new debt An/r a present value of an annuity discounted at r, the current interest rate. 31 which reduces : V* = P - (C +rB) (Eq. 16) Therefore: v = v* if 1* = r3 (Eq. 17) He therefore concludes that the value of debt before and after the refund is equal only when the before-tax rate of interest is used as the discount rate. Gordon Gordon's argument for a before-tax discount rate is based upon the opportunity cost to the investors in the company. He asserts that investors can earn the before-tax cost of debt when investing in similar securities. Therefore, this rate should be used to discount the bonds'cash flows assuming investors'opportunity cost is the primary investment critethniin a refunding decision in spite of the fact that the firm's cost is after-tax. Advocates of the use of the after-tax discount rate on new debt include Bowlin [1966] and Mayor and McCoin [1974]. Ofer and Taggart [1977] also advocate the after-tax discount rate but under a limiting assumption. Bowlin Bowlin [1966] states "the discount rate to apply to future interest savings should be the total cost (including both explicit and "14 implicit costs) of the funds necessary to make the investment. He concludes that the net cash investment required to finance the 32 refunding can be obtained by debt which in turn would not require a change in equity in order to maximize the firm's capital structure. Therefore, the net yield (after-tax cost of debt) which represents the firm's cost of debt should be used as the discount rate applied to the net cash investment. Mayor and McCoin Mayor and McCoin [1974] attempt to resolve the appropriate dis— count rate dilemma by viewing the refunding decision in terms of the 15 They review the refunding process financial theory of the firm. as a pure refunding, i.e., affects only the debt refunded and a mixed refunding, i.e. affects other balance sheet items as in cash repurchase of debt or bond for stock exchanges. The pure refunding analysis is comparable to that performed by Bowlin and, like Bowlin, they conclude -the after-tax cost of debt be used in a pure refunding case. In mixed refunding they propose a rate equal to the opportunity cost of risk- adjusted net rate of return on the firm's best alternative use of funds. This rate should never be lower than the net refunding rate since the firm has the alternative of buying back its own debt. Ofer and Taggart Ofer and Taggart [1977] review the refunding decision in light of the valuation of a firm's securities. They incorporate M and M's 1963 market valuation theory in their evaluation of bond refundings. First they show the before-tax interest rate is appropriate when the firm's net refunding costs are equity financed. Alternatively, if refunding costs are financed by the new bond issue,the after-tax cost of debt is appropriate. In addition, Ofer and Taggart conclude that 33 the determination of an appropriate discount rate is related to how debt capacity is defined. If defined in terms of a debt coverage ratio, the after-tax rate on new debt is appropriate. If defined in terms of debt to equity ratio, the before-tax rate on new debt is appro- priate. In summary, the rate of interest on new debt is generally con- sidered the appropriate discount rate to use in analyzing refunding decisions. The major point of contention relates to use of a before or after-tax rate. In this study both the before and after-tax interest rates on new debt will be used to discount refunding cash flows. Major consideration will be given to after-tax calculations, however, since most of the literature and this author believe in its theoretical justification. Empirical Tests of Bond Refundingg Only two authors, Bowlin [1966] and Loy and Toole [1980], attempted any serious empirical analysis of bond refunding. Bowlin Bowlin developed a questionnaire whiCh he sent to 33 public utilities that refunded premium bonds during the 1962 through 1963 calendar years. From the 30 responding firms he found that most firms refunded primarily to reduce interest charges and secondly to lengthen the maturity of debt. Bowlin them compared the net yield on the re- funding bonds with the calculated rate of return on refunding.16 More than fifty percent of the after-tax rates of return on the refunding fell between ten and twenty percent while all of the before-tax yields on the refunding fell between four and five percent. His results imply 34 that none of the refundings were unprofitable, i.e., all had positive rates of return. No extension of the research to shareholder wealth was undertaken or implied. Loy and Toole Loy and Toole under took a net present value analysis of 37 exchanges of discounted convertible bonds occurring during the 1970 through 1977 calendar years. The purpoSe of their study was to compare the net present value of the refunding with the FASB reporting require— ments, i.e., FAS #4. Most of their net present values were negative (30) while FAS #4—reported gains from the extinguishment of the old debt and were categorized as an extraordinary item. In fifteen cases more than half of the reported income for the year was due to the exchange. The results show an inconsistency between the reporting standards and Loy and Toole's calculations of the cash flows associated with the refund. They conclude that an ideal accounting procedure should disclose a realized loss from the refund. No extension of the results to shareholder wealth was pursued which could have aided in proving the validity of their cash flow calculations and resulting inferences. In particular, a change in shareholder wealth should correlate with their cash flow calculations if their assertions are valid. In summary, empirical evaluations of the exchange decision is a small part of the literature. Authors have not attempted to analyze the economic effects of the exchange decision on shareholder wealth. The purpose of this study is to investigate that proposed relationship. 35 Summary An extensive body of theoretical literature exists concerning capital structure theory beginning with M and M's original propositions. The empirical testing of capital structure theory has been confounded by the simultaneous effects associated with the investment aspect of the decision. Research by Masulis and Mikkelson circumvented the in- vestment factor by analyzing stock for bond exchanges. The bond for bond exchange analyzed in this study allows for a unique opportunity to look at the investment aspect of an exchange since it is not con- founded by a change in capital structure since the market value of debt remains constant. There is a considerable body of literature dealing with the cash flow analysis of bond exchanges. Various cash flow models have been forwarded that are essentially the same except for the definition of particular variables. The major controversy has revolved around an appropriate discount rate to use in the net present value calculation. While the rate on new debt is generally accepted as an appropriate dis- count rate, a debate still exist over the question of using the before or after-tax rate. As mentioned above, empirical investigations have been minimal and limited in scope. 36 Chapter II - Footnotes The riskless debt assumption was shown to be only a simplifying assumption in subsequent work done by Fama and Miller [1972] and Rubinstein [1973]. See Kraus and Litzenburger [1973] and/or Brennan and Schwartz [1978]. Warner [1976] estimates the direct costs of bankruptcy for a sample of 33 railroads. ‘Masulis [1980] pg. 165 and pg. 175. Masulis, for example, found no effect when preferred stock was exchanged for common stock. Since tax shield is the major differ- ence when comparing this exchange to a debt for common stock ex- change,an association between the price effect on common stock and tax shield was proposed. Both authors assume "pure" capital structure changes which enables them to assume away any investment aspects of the decision. Yawitz and Anderson assume a refunding of callable bonds with a noncallable issue after a decline in interest rate. Y 8 A conclude the use of the after tax rate underestimates the value of the refunding to the shareholder. This is demonstrated in the expressions for the value of interest savings: n (i -i )L (l-T) i L after tax: 2 2 l 2 t .C—I—Z- - L) C ", 1 ID t=1 [1+il(l-t)] 1 [l+il(l-T)] =(L L)' l 2 an two perpetuity values of bonds (old and new respectively) where: L1 and L2 1 and 12 1 two interest rate (old and new respectively) T = tax rate number of periods to maturity :3 II and before tax : n iZL2 L2 iZL2 1 Z —“'£+—‘;;-L2=T“'Lz ”—7; t=1 (1+11) (1+il) 1 (1+11) = (Ll.— 10. ll. 12. 13. 14. 15. 16. 37 I concluding that since an > on for finite n,the after-tax discount rate underestimates the value of refunding to shareholders. The theoretical question concerning the appropriate re-investment rate for the discount periods in which payments are not co- incidental between bond issues is not addressed. The model is forwarded as a reasonable estimate of cash flows resulting from the exchange. Ang also develops a dynamic programming solution for the refunding of discounted bonds (pp. 781-783). Ang does not address the tax effect(s) associated with the refunding gain. He simply includes the gain as a portion of refunding costs. Ofer and Taggart evaluate any beneficial change in the firm's debt capacity from the refunding activity. Evaluation of this benefit is dependent on how debt capacity is measured. If viewed in terms of a coverage ratio, the after—tax interest rate is appropriate since these ratios are incorporate after tax decision rules. Alternatively, if debt capacity is viewed in terms of debt to value ratios the before-tax rate of interest since book value amounts are being compared. Bowlin [1966] and Schwartz [1967] forward persuasive arguments renouncing the use of a firm's cost of capital as the discount rate in bond refundings. Bowlin, Oswald. "The Refunding Decision: Another Special Case in Capital Budgeting." Journal of Finance 21 (March 1966), pg. 63. Major and McCoin develop capital budgeting formulas (i.ex NPV calculations) where the refunding should be undertaken if the NPV of the change (decline) in future debt charges is greater than the refunding expenses. The rate of return is an internal rate of return calculation where the interest savings to maturity of the refunded bonds are dis- counted back at a rate which equates them with the net cash investment. CHAPTER III DEBT EXCHANGE FRAMEWORK AND SAMPLE SELECTION DEBT EXCHANGE FRAMEWORK Bond for Bond Exchange Process An exchange offer gives holders of one class of securities the Opportunity to trade their securities for a different class of the same firm's securities. Types of exchanges include (1) bond and preferred stock, (2) bond and common stock, (3) preferred and common stock and (4) bond for bond exchanges. Masulis examined exchange types (1)-(3). Here the bond for bond exchange is analyzed and specifically,discounted long-term bonds. In the case of discounted bonds, a firm will offer a new bond with a higher coupon rate in exchange for an old bond bearing a lower interest rate. The stated principal value of the new bond is usually above the market value of the old bonds prior to the exchange announcement. The market value of the new bond is generally very close to its principal value which means any difference between the market values of the old bonds and principal value of the new bonds is a form of exchange premium. Table II compares principal values of new bonds with pre-exchange offer market values of old bonds.l Taking Athlone Industries as an example, the exchange offered holders of $35 principal 5.7% convertible subordinated bonds the opportunity to exchange these bonds for $30 principal 11% sinking fund bonds. The 5.7% convertible bonds were quoted a market value of $28 one day prior to the 38 39 TABLE ‘I New Issues Principal Value and Old Issues Market Value Old New Old Issue(s) Issue(s) Issue(s) Market Principal Principal Value Allegheny Ludlum Industries Inc. $ 500 $ 500 $460 Athlone Industries Inc. 30 35 28 Bay Colony Property Co. 1,050* 1,000 722.5 Chelsea Industries Inc. 650 1,000 570 Columbia Pictures Industries Inc. 550** 1,000 460 & 470 Condec Corporation 800 1,000 590 Cooper Labs Inc. 600 1,000 472.5 Dillingham Corporation 625 1,000 590 Fairchild Industries Inc. 875 1,000 680 Fedders Corporation 675 1,000 565 Fibreboard Corporation 750 1,000 620 General Instruments 650 1,000 517.5 Grumman Corporation 600 1,000 510 Insilco 650 1,000 595 Institutional Investors Trust 1,050*** 1,000 885 LTV Corporation 640 1,000 568.75 McCulloch Oil Corporation 550 1,000 430 Mohawk Data Sciences 550 1,000 352.5 Pittston Company 600 1,000 562.5 Ramada Inns 600 1,000 510 Sanders Associates Inc. 500 1,000 330 United Airlines (UAL) 742 1,000 645 " " 644 1,000 560 Western Union Co. 560**** 1,000 565 Zapata 750 1,000 620 *plus 20 shares of common stock @ $2.50 share (market). **plus 8 shares of common stock @ $8.00 share (market). ***plus 50 shares of common stock @ $2.26 share (market). ****p1us $100 cash. 4O announcement of the exchange. The $2 ($30-$28) represents an exchange premium. The exchange of bonds is voluntary on the part of bondholders. The process begins with the approval by the firm's board of directors.2 The approval of security holders is normally not required. This is in contrast to recapitalizations which require all the security holders of the old issue participate in the recapitalization. Similar to an exchange, a recapitalization is usually proposed by management and sub- mitted to the board of directors for approval. If approved by the board, the recapitalization plan is then submitted to the security holders who will be directly affected. Usually a majority of the secu- rity holders must approve of the recapitalization plan before it can be undertaken by the firm. If approved, all holders of that security class being retired are normally required to accept the exchange of their securities.3 Once the bond for bond exchange is approved by the board of directors, an S-l registration statement is filed with the Securities and Exchange Commission (SEC).4 The S-l statement is required by the SEC if the firm uses outside soliciting agents to carry out the ex- Change. Most firms in this study did file S-l statements. In addition to the S-l statement, the firm is also required to submit a security registration statement with the listing stock ex- change. The registration statement requires specific information regarding the new bond issue and the exchange terms. The information includes a description of new bond issue, terms of the exchange offer, reasons for the bond exchange, potential tax consequences to the firm and other pertinent information. All firms in this study are either 41 listed on the New York Stock Exchange (NYSE) or American.Stock Exchange (ASE). Usually, coincidental with the exchange registration is an announcement in the Wall Street Journal describing the proposed terms of the exchange offer. The terms include face value and coupon rates of the old and new bonds and their exchange relationship. The firm then sends a prospectus of the exchange to appropriate security holders. This mailing signals the beginning of the exchange offer. The duration of the offer is initially set for approximately 30 days. In most instances, however, exchange offers are extended up to three additional months. These extensions are normally announced in the Wall Street Journal. Once the exchange offer expires, the firm files an 8K report with the SEC. The 8K details the exchange in terms of the number of new securities issued and old securities redeemed. The firm is required to file the 8K within 10 days of the month in which the exchange occurred. This filing is required if any class of the firm's publicly held securities is either increased or decreased by five percent or more. Public announcements reported in the Wall Street Journal occur when the board of directors initially announce the exchange, when the terms of the exchange are made public, and when the results of the exchange are realized. Due to the prevalence of extensions to the exchange, several results announcements are often reported. Table II shows the public announcements associated with each firm in the sample. In general the entire exchange process, from board of directors' approval to the termination of the exchange offer, takes four to six months. 42 TABLE II Individual Firm Announcements Firm Announcements Allegheny Airlines Inc. (U.S. Air) Allegheny Ludlum Industries, Inc. American Medicorp Athlone Industries, Inc. Bay Colony Property Company Chase Manhattan Mortgage & Realty Co. Chelsea Industries Columbia Pictures Industries, Inc. Condec Corporation Cooper Labs Dillingham Corporation Fairchild Industries, Inc. Fedders Corporation Fibreboard Corporation General Host General Instruments Grumman Corporation Gulf & Western Industries, Inc. Insilco Corporation Institutional Investors Trust LTV Corporation McCulloch Oil Corporation MGM Mohawk Data Sciences Corporation National Industries, Inc. Pan American Airlines Pioneer Texas Corporation Pittston Company Ramada Inns Rapid American Corporation Roblin Industries, Inc. Rusco Industries, Inc. Sanders Associates, Inc. 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GRAPH #14 GRAPH #15 an.» n .a r r r . cne.ntntooz.acrunt seven rsx.ntau noctL :1-5 E £002 c "“L “' 5' a‘ "5“" BCOEL a 3 1.71m 3 2: 2 a t > C 2 ii .6. g 8 ..ma 8 3 as L“) Li- --mm L —a:m- -. ‘6' ' u 4 I u TABLE XXIV Positive/Msgative NPV Firms '\ Period 2 - After-Tax Discount Rate Mean Returns Model 1001 Exchange Negative NPV Pirms (ll) Positive NPV Firms (25) Standard Cumulative Residuals Cumulative Zscore on Average Residuals Average Residuals Average Residuals 107 Nnvun~hcovwnotheooconhhuuo¢00¢o OOOONO¢¢hFOhOOcconnhhunnmwcvcnu Ophecuofib~omvhowhoooctnucucONOO nn~mOMNBNBOhNuOthuhuuumuOFMON. uu¢nn0~°¢-n~oomhonuccuoocenweo 0.0.0.0000...0.000.000.0000000. uuuuuuuuuuuuuu l I |ll '3‘ CHIN—IQ“ “001’ OONN W OMONMNOWNCMOGH {enchanomonmcnne—MOOOhnuuo—OON NFMN°¢G~POO~IF 00-009 OFF.NI\NI\e-0\~IHQOO OOOHHNNMMMMQ NF" ”MONNNOONNfllO—OO‘ OOOOOOOOGGOGOOOOOOOOOOOOOOOOOOO ouuochmoo¢ono~pno¢ouuuoognoo—oo soucuuv~~ucn0~n~hooonOuoooeuONG uOOuhOnhunh¢~ncchomu0uuoomuOfine nuoooowoouhunonncnmuahnonuhnnon echoucn0ucmou0n¢h¢~ooopeonhn0¢o .0.0.00000000000000000000000.0. lulu ul .u7l~l TlluTulluu?rl oooo-0nmun~ooooonno~o~oo~~nhoa enuohnnoonoooeocoweocuueonuncwh MOONEvNNO Oct chumNuNonOMNMOOM-IO OOOOOOOuOOGOuONOOOuOOuuMOOuuucO aoooocoooooocoococccooococcccoo 00.000.00.0000000000000000000000 I I K II I IIIII III III Standard Cumulative Residuals Cumulative 2 score on. Average Residuals Average Residuals Average Residuals REX. Oue-ONF-POHFOOerMMOMOCONCWOhOOnNHO uo~0m6h~on~oo~~nc~n0uhooonoo~¢o CONuONONOOonU‘uNNNMlnflONafODMND4‘09! OOOMunhirNuONNNOK‘OOOOOOh—OOOONO-MN uoc¢~uum¢ONOOONthuOOuOOOOOONNO 0000000000000000000000000000000 IIIlIIlIIIIIIIIIIITTTTTllTTI7TI nooch¢ucoOOOOkhnOOONuOODOuOunce connNhnnoO¢Mhnuom00¢0u000¢hocon n~onh~¢00~¢~oeooconsume—conhnnc OOHuOOOCOuOOOOOOHNNNNNNNu—NuMMN OOOOOGGOGOOOOOOOOOOOOGOOOOOOOOO oaowoounuOhhou~ocm0ue~bonuoocan N00 0 on 00-00160 “n00 ONIflFMhNIflOMN—OONOM OhOuOOu¢flOOhhu~OOOhOu~OuMNMOOMO uOuOBOONM#OOONO¢nOOOOOMF¢NOuNO¢' FONMOMOOOOFFOOFOuOOOMuNONOOOONfi- eeeeeeeeeeeeepeeeseeeseeeeeeeer I ? d Illflll I ITI II II T u. BN°¢NMMONdOOOO°NmOONOOdOOu¢¢uNO CFNONC‘NO “HnOMHONM NOFOFNOO O G‘s-00¢ I“ “OOMOONOOMOO¢N¢OHOOGOMMONONéflcO OGNOOOOOOOuOOOOOOHOOOOOOOOOOHOO OOOOOOOOOOOOOOOOOOOOO6000000090 “in”,.P‘“¢MNH°HNMC“OFQO¢F‘NM¢G l 0 “III." IV! "(In “SIMS 108 GRAPH #16 2 El! RESOJERIOOZJOO Z I'TER 708.859" HOOEL l-SCOIE N “VIM “SIMS I k :7‘ \ . 1 x V “7.) M «as m --we onus- ... :2. «a -e n“ a u GRAPH #17 GRAPH #18 isnmggtoozdoo 2 any 1'“th «0051. g A} til-PtnoanOO 7. QFYER Taxman noon 4. g 1.11s» 5 d 3 sea) a... E n 1 S _. l 3 «0% V 3 mm 3 “u, mm ml. was c... -mm -a I -~ ---~ g, a." 108 GRAPH #16 Z l!!! RESOJERIOOZJOO I GIVE! TRLHERN MODEL I user OI meant REGIME I - - k > “‘m‘. J (MINI! meant IIIIMS um- .00 —m ~— cm I. -s TIRE a la GRAPH #17 GRAPH #18 CflI.PER[°OZ,|oo z “RTE. 73X.fl£fll "DUEL 2E CHR.'ERIODZ.IOO Z “PIER IHX.H£RN ”DUEL -~ g lJlI) E d g a) g . a... 5 4.. 1 .3. V Y, 5.... 5 o... W' «as m f —maa } -maa -_ -Is~ 11.0.. £ ‘hfllv -I I’ll! - flu! 109 Measurement of the actual relationships will be directly addressed in the correlation analysis to follow. Third Announcement Period Period three is when the announcement of the actual results of the exchange occurs. Since the actual results are known, only the NPV calculations pertaining to actual results are used in the analysis. Investors can now value the effect of the exchange on shareholder wealth with greater certainty given the results announce- ment. Table XXV and associated Graphs 19, 20 and 21 depict the 2- scores on residuals during the third announcement period. Over the three day announcement period, day t exhibits a moderately positive +1 reaction with a Z-score of 1.56. More significant Z-scores are realized on the residuals observed after the three day announcement and t have Z-scores of -2.559 and period. In particular, days t+2 +6 2.459 respectively. Greater variation in returns over the post- announcement period was also observed in period 2 (see Graph #10). In Part 2, cumulative residuals over the sixteen day period, t__1 to t+15, for each of the three announcement periods will be compared to the NPV calculations to determine if the post-announcement residuals are correlated with the NPV calculations. Since the total portfolio returns over the three day announce- ment period could have averaged out any differential reaction asso- ciated with the proposed positive versus negative NPV portfolios, these portfolios were also analyzed separately. Table XXV and Graphs 22 through 24 display results of the residual analysis using the after-tax discount rate and mean returns methodology on positive and 110 TABLE XXV Period 3 — Mean Model Residuals Standard Standard Day Average Average Cumulative Residuals Residuals Residuals -15 .00097 .81927 .81927 -.01150 -l.21155 -.03743 .00692 .36845 .17529 .00692 .36845 .17529 .00631 .40411 .37735 -.00603 -1.15433 -.13888 -10 -.00225 -.63017 -.39615 .00036 -.26084 -.49474 -.00436 -.19808 -.56477 -.00141 -.09898 -.59776 -.00396 -4.7796 -.74891 -5 -.00586 -1.40752 -1.17329 .00006 -.03717 -l.18403 -.00287 -.71392 -1.38203 -.00511 -.67613 -l.56274 -.00115 -.10755 -1.59051 0 .00082 -.50484 -1.7l672 .00507 1.56112 -1.33809 -.01552 -2.55943 -1.94135 -.00524 -.42977 -2.03995 .00175 .47315 -1.93415 5 .00350 .62319 -1.79816 .02009 2.45992 -1.27370 .00591 1.42521 -.97652 .00099 -.00589 -.97773 .01079 1.19907 -.73791 10 .00345 .31894 -.67537 .00176 -.23326 -.72025 -.00509 -1.10302 -.92871 .00512 .69120 -.80035 .00306 .79884 -.65451 15 .00034 .57071 -.55200 1.1;1 (3111\I?}I #5157 2459!! OVERHOC RESIOURLSJERIOO 3.5!”! HOOEL L z-scoet as outcast etsnsusts [2:1 GRAPH #20 CO" EVE RESOSJERIOO LEERM HOOEL m- CMIII I V! “Vim “SIMS 1 M V ”gt“. l-OCM N (WRIIVE ”(m “SIMS I GRAPH #21 §;scoat tun avt etsos.rrnzoo 3.a£a~ BOOEL M 1-4 TABLE XXVI Positive/Negative NPV Firms Period 3 - After-Tax Discount Rate Mean Model Actual Exchange llegative NPV Firms (11) Positive IIPV Firms (37) Standard Cumulative Residuals Cumulative Standard 2 score on Cumulative zsuneon Cumulative Average Average Average Residuals' Residuals Residuals Residuals Residuals Average Average Residuals Average Residuals 221 uuuuuu IIIIII 1112 t «unmcomononmaonoocau DMOOMQOOQN ~cn~h~~vnn~dnnoono~hnu~~houncoo toMNnOCQMNnOhuanOouONumm3cmooo NenoOMNMMOMOOommuNhLMNhhchoovmu In-nmurthnnunoun—HVOwumuoowu-u~eu4nu—~uvevmenns\ 000000.000000000000000.0000.0... llluuuluuuuNN~um--u~~~-~~N -,lJ _ II II II II II II II II II II II «moncuannuouooonnonébaoo~ooooo~ K O Mai-INOFOFUIIMO fiflOd‘O-HOMNNOOIQNBFO uJ€NmOOO¢M30¢N¢Nh¢OuNODNnunnnh~ hw-aw~tunmu~¢u~nuv«hrcmn¢u3m-aumo~04fievwawund’ on~cwcooom~ecm:cn~~¢eae0n~n¢-~ 0000000.0-00000.000000000000000.0. "I7II7I I I?II IIII II Iu ' I “DOOMMOOOMNhovcnva¢°ona.» OflfiOOONhhn°NNOOGHOOOuOOOOOOnOdC FON'NONNJ‘ONM *OMOO O‘NOONCC ON” 00 ouooooooocoo~co~ooooouoeoco~eoc 00°DOOOOOOOOOOOOOOOOOOOCOOO309° eeeeeeesee-eeeseeseeeeeseeeeeees IIIIII I-WIII III. II I I cohowhoa—owoon—o—cobachanOhuoun naus-cm~~n~s~humonnnncnnco~~uo noooooonOuoochwauooonmoonoo~-n anaconnnchuhnwcoquhhpococwhcoo Ouowuuuocoenunmo-~oco~nosso~oc 000.000.0000.. 0.0.0.00000... sea I IIIIIIIIIIIII u Btu—IDOOBOQNOOOOOOufiOuhhMMOMWG hhl" OONODHOOnuuNOMNummnNNQ comm unQONNONhobotoOOMthnumuGqu¢0N loans—«Den:cu:cu»awn—u—euueuneun—«DCu-euuenumun OOflOOOOOOOOOOOOOOOOOOQOOOOOOOOO 00.0.0'00000000000000000.00000.. hunOOnNMOOI‘MONOOOMMNOBm.” OMMOOOBONNMOOGO~INMOO¢MNO00'0““ #50 01-00 Flo—IO {NMDOOHOMDNONM WM OOOMI‘OONOOONOMHOOOOI‘hh—‘Dt MM 0500100000015 OONhOe-IOOI‘OM GO MOM 001m 0.000000000000000‘0000.0000. 0.000 Tuul Ill? l Tuvl uNu u ll non-o~oconwoounouhwnnooooNNNOO hoooma0~n0~em¢0n~ooo°~nm~omoans uuNObOuhcuuu¢nu¢hhoocuovhwOuOCM OuquOOOOOuOOOOOQHOOONOOuOOOOOO OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOQ 00.00.000.000.0.0.0.00000.0.... menu—cochonenuuenuncnohqpouunon llllllllr Huuuun GRAPH #22 3. 2 MI 3 U A“ .L: " " TIRE GRAPH #23 111.3 2 EVE RESOJEIIOOLHCTUGL ”7E! YRXJERN MODEL 242‘ -- n‘ cm- ”I” tse.'tnlooa.ntruat spree fax.nta~ HOOEL .Iln g \J/\4\ i g A... U ’ C U 2 3 "CI. U 0"“ ul- — ' «l-n a.” l-OCM M CIMIILIIIIVE muss: "SIMS . O (SILAPWi #7241 Z CRR.PERIOD3.9CTURL “PIER YRXJ'ERN MODEL 1..“ 114 negative portfolios. Z-scores over the three day test period for both positive and negative NPV firms show no significant differential reaction with the announcement of the exchange results. However, a substantially different result was obtained from the analysis when the sample was divided between positive and negative NPV firms using a before-tax discount rate (Table A-14, Graphs A913 through A915).10 For positive NPV firms days t_l and t0 have small negative residuals while day t has a large positive residual with a Z-score +1 significant at 2.5% level. However, given the additional Z-scores over the thirty-one day test period, the larger of which are also posi- tive, no strong conclusions can be drawn from the significant 2 in t+1. The negative NPV firms, however, have negative Z-scores in each of the three days of the announcement period. The larger Z-score of 92.677 in t+1 corresponds with the large positive 2 in T+1 for posi- tive NPV firms. From Graph A913 it can be seen that essentially all daily return movements for the two portfolios were in the same direction. This suggests that investors adjusted their valuation consistent with the results announcement. A direct measure of this association between proposed cash flows and investor behavior over the announcement period is provided in the correlation analysis to follow. Summary Results obtained from the mean returns model analysis show significant positive abnormal returns for the entire portfolio during the three day period around the initial announcement date. While the positive NPV firm portfolio had a greater CAR over the three day period, both positive NPV and negative NPV portfolios had significantly 115 positive residuals. It is apparent that shareholders perceive the exchange as increasing their wealth. Assuming the mean returns model methodology is accurate in measuring abnormal performance, questions arise concerning whether or not the proposed cash flow models, or a close facsimile, are useful measures of the exchange's value to equity holders. Given, however, the fact that no informa- tion regarding the terms or timing of the exchange are publicly available in this announcement period, investors may be using some surrogate variables to measure the exchange value. If so, adjustments to their initial announcement valuation would be expected as addi- tional information regarding the exchange is announced publicly. Results from the first announcement do, however, support the semi- strong form of market efficiency. During the second announcement period, when the terms of the exchange were made public, no significant abnormal returns for the entire portfolio, nor for the positive and negative NPV portfolios taken separately, were realized over the three day period. These results suggest that the market had already incorporated any economic content of this information into the stock price. Either investors were able to calculate and impound this information during the first announcement period or additional sources of information between announcement dates11 enabled them to revise their probability distribu- tions of expected returns. Both of these possibilities will be addressed directly in the cross-sectional correlation analysis to follow. In the third announcement period no significant excess returns were realized for the total portfolio. However, the third M; 1.1 A" 116 announcement period did provide some interesting results when residuals for the positive versus negative NPV portfolios were examined. For the first time, a modest inconsistency in results existed when the after-tax versus before-tax discount rate NPV portfolio residuals were compared. Both portfolios exhibited more significant abnormal returns when the portfolios were classified by using the before-tax discount rate rather than the after-tax rate. Results using the mar- ket model methodology were consistent with this finding. The period three results, in particular the before-tax portfolio results, support the inference that the equity market valued these firms'securities consistent with the proposed cash flow model. This consistency occurred when all cash flow information concerning the actual exchange results became public. This result, however, does not explain the sig- nificant excess returns which occurred in the first announcement period. Graphs #25, 26 and 27 depict the residual behavior over all three thirty-one day announcement periods for the entire portfolio. The relative significance of the period one residual is obvious in viewing the graphs. While only period three residuals appear to be directly related to the NPV calculations, the sum of these residuals over all three periods, when compared to NPV calculations, may exhibit a stronger association. This question will be addressed in the cor- relation analysis. Finally, as noted previously, an aside to this analysis is to compare the mean adjusted return methodology results with the market model results. Appendix C contains graphic comparisons of the residuals of each model over the three announcement periods. Graphs C91, C92 and C-3 are comparative graphs for period one, C94, (“II (“32 CRIB I 1100 117 GRAPH #25 ZoSCORE RVERROE RESIDURLSmERN MODEL 4 :- M «n g 3.”! - , c “‘ L 3 H 1.004) a: fi 3 L 1 3 led x > , c . I. “m a 1’ C > U N 1.!!!) mm --ma ‘ -Mfl *Mfl , .. 9-meee: "-18 -s 0 1| - TIME GRAPH #26 GRAPH #27 CUH EVE RESOSmEAN HOOEL z __ Z-SCORE CUB ME RESOSJERN HOOP.» M i 2 N E 2 i 8 8 1mm 1.3 mm -gg. —II. Qua-l -Ifl-l a.“ -1“! new .'d -m TIME 118 C95 and C96 for period two, and C97, C98 and C99 for period three. Brown and Warner [1980], in a comparative analysis, conclude that both models generally measured artificially induced abnormal performance equally well. Reviewing Graph C-l through C99, it is apparent that the abnormal performance measurements obtained by the models in this analysis support the conclusions drawn by Brown and Warner [1980]. It appears from the graphs that the mean model may be slightly more conservative but not consistently so. 119 Part 2: Correlation Analysis The preceding residual analysis enabled us to evaluate the abnormal performance of the NPV portfolios. The specific relationship between the size of any firm's abnormal return and the relative size of the firm's NPV was not addressed. As mentioned in Chapter I, the effect of the exchange on the market value of common stock is expected to be directly related to the relative size of the exchange's NPV as follows: where any abnormal performance due to the exchange is equal to the NPV of the exchange standardized by the pre-exchange market value of the firms equity. The larger the relative NPV of the exchange,the greater the expected effect on the firm's shareholder wealth. Correlation analysis enables us to measure the individual announcement's relationship between excess returns and standardized NPV, as well..as the relationship between cumulative returns over the three periods and the standardized NPV. Measurement of the cumulative effects of the relationship takes into account any period by period valuation adjustments which may have occurred with the additional announcements of exchange information. Measurement of cumulative effects is valid if the portfolids systematic risk has not shifted between announcement periods. Since the capital structure of the firm remains constant, the exchange of bonds would theoretically not affect systematic risk. 120 First Announcement Period Table XXVII summarizes the Spearman rank order correlation factors when residuals are calculated using the mean adjusted returns methodology and the NPV is calculated using both the after-tax and before-tax discount rates. As the table shows, the relationship be- ‘rtween HPV and the residuals is generally negative. The after-tax stan- dardized NPV's exhibit a strongly negative relationship with residuals over the average of the three day period, which is inconsistent with the proposed positive assoéiation. Correlations using a before-tax discount rate to calculate the NPV of the cash flows are positive but insignificant. The results suggest a dependency on the discount rate employed to calculate the NPV's. This is not surprising since the NPV calculations are tightly clustered around zero, which can result in large shifts in firm rankings between the two NPV calculations. Tables D91 through D94 display the NPV to market value calculations. Pearson product moment correlations were also calculated and are displayed in Table A915. These correlations are independent of the means and standard deviations of the variables, but are subject to being biased by several highly correlated observations in the sample of forty firms.12 As Table A915 shows, however, the results are con- sistent with those calculated using the Spearman rank correlations. The results of period one correlations suggest no positive relationship between NPV and the abnormal returns of the exchange.13 In the context of investment theory, either the models are mis-speci- fied (assuming the available information is sufficient for investors to value the exchange) or the available information is insufficient and some surrogate variab1e(s) are being used by investors to value the 121 TABLE XXVII Period 1 Spearman Rank order Correlations Mean Model Returns After-tax Before-tax Discount Rate Discount Rate Spearman Probability Spearman Probability 100% Exchange t - 1 .1227 .226 .3242 .021 t 0 9.1371 .200 9.0970 .276 t + l 9.1559 .169 .0572 .363 Average 9.2298 .077 .0251 .439 Actual Exchange t 9 l .0426 .398 .4227 .004 t 0 9.1593 .164 9.1122 .246 t + 1 9.1548 .171 9.0362 .413 Average 9.2831 .039 .0636 .349 exchange. If so, these variables exhibit a poor relationship with the cash flow models employed. Other factors related to Jensen-Meckling agency theory may be central to the observed relationships. In par- ticular, if the exchange results in less stringent debt covenants, management may realize greater flexibility regarding dividend payments, future debt issues, and working capital maintenance. The effect of these factors on the investor's probability distributions of expected returns would not be incorporated in the NPV calculation. However, these potential wealth effects are not quantifiable and are beyond the scope of this analysis. The assumption at this point is that these agency costs are insignificant and that the value of the exchange process, as a whole, closely approximates the objective cash flows 122 proposed. Comparison of total residuals over the three announcement periods with the market adjusted cash flow calculations will provide evidence regarding this assumption. First, the remaining two periods' correlation results will be addressed independently. Second Announcement Period Period two correlations, using the before or after-tax dis- count rate, exhibit results inconsistent with the proposed investment relationship. As Table XXVII shows, the average correlations of period two residuals and NPV's are negative. As was the case in period one, the average after-tax correlations exhibit a very high level of nega- tive correlation. The correlation's before-tax NPV's and average residuals are more consistent with the proposed relationship of the exchange cash flows and the valuation of common stock. The Spearman correlations presented in Table A916 and B927 exhibit a similar rela- tionship, with the after-tax NPV being less consistent (although posi- tive) with investment theory than the before-tax NPV. However, the excess returns in period two were insignificant, which in isolation adds little explanation to the observed excess returns in period one. In fact, if period two's excess returns were strictly due to a re- assessment of period one expectations, it is unlikely the standardized NPV's would be correlated with period two abnormal returns. Correla- tions on the summation of excess returns over the three periods and the standardized NPV will help clarify the relationship. 123 TABLE XXVIII Period 2 Spearman Rank Order Correlations Mean Model Returns After-tax Before—tax Discount Rate Discount Rate Spearman Probability Spearman Probability 100% Exchange 9.3091 .034 9.0386 .412 t 9 1 9.3091 .034 9.0386 .412 t 0 .0124 .472 9.0314 .428 t + 1 9.1421 .205 .0394 .410 Average 9.2394 .080 9.0018 .496 Actual Exchange t 9 1 9.2934 .042 9.0008 .499 t 0 9.0088 .480 9.0088 .480 t + 1 9.1573 .180 .0154 .465 Average 9.2371 .082 9.0404 .408 Third Announcement Period The announcement of results correlations were performed on actual results data, since this information was now available to in- vestors. As Table XXIX shows, interpretation of results is again dependent upon the discount rate employed in the NPV calculation. The after-tax discount rate correlations are negative while the before-tax correlations are positive. If the investor reaction in period three is independent of the first two periods,the results theoretically support the use of the before-tax discount rate to mea- sure the present value of the net cash flows.14 However, measurement of the relationship between net cash flows and abnormal returns is 124 dependent upon when the equity holders incorporated the cash flow infor- mation into their security valuation. Since each announcement provided additional cash flow information to investors, the valuation of the exchanges impact could logically be cumulative over the three announce- ment periods. TABLE XXIX Period 3 Spearman Rank Order Correlations Mean Model Returns Actual ExChange Spearman Probability After-tax Discount Rate t 9 1 9.0944 .287 t 0 9.2524 .064 t + 1 .0697. .339 Average 9.1982 .117 Before-tax Discount Rate t 9 1 9.1822 .137 t 0 .0612 .358 t + l .2115 .102 Average .0999 .276 Aggregated Correlations Residuals t_1, to, and t+1 in each period were summed respec- tively over the three announcement periods. If the three announce— ments comprise the total value of the exchange, the total of the residuals would be correlated with the total value of the exchange as 125 measured by the NPV. Table XXX summarizes the correlations between the summed residuals and standardized Nva. The total firm correla- tions for the after-tax standardized NPV calculations exhibited a negative relationship with the abnormal returns.15 Similar results are found when the market model is used (Table B929) regardless of the correlation analysis used (Tables A918 and B934). This is not surprising since the relationship between abnormal equity returns and the after-tax standardized NPVh were negative in the three announcement periods. Correlations between the summed residuals and the before-tax standardized NPVb are positive for both the mean and market model residual analysis using either the Spearman rank or Pearson correla- tions (Tables XXX, B929, A918, and B934). With the exception of the mean model analysis Spearman correlations,a11 correlations were sig- nificant at the twenty percent level. A correlation significant at the 8 percent level was observed when the Spearman correlation was calcu- lated on the mean model residuals and before-tax NPVb. While the positive relationships observed above are consistent with the proposed association between standardized NPVs and abnormal equity returns, the results in general do not strongly support that relationship. Therefore, either 1) the nine day period tested does not encompass the entire wealth effect of the exchange, 2) the cash flow models employed are inaccurate, or 3) other factors besides the cash flow variables proposed are being used by investors to value the equity securities. All these possibilities deserve addressing. 126 TABLE XXX Spearman Rank Order Correlations Aggregated Corrrelations Actual Exchange Results Mean Model Residuals Spearman Probability After-tax Discount Rate t - l 9.3308 .027 t 0 9.2538 .071 Average 9.1818 .148 Before-tax Discount Rate t 9 l .1120 .261 t 0 .0804 .324 t + 1 .1585 .182 Average .2448 .079 Reviewing the CAR graphs of all three periods (Graphs 2, 5, ll, 14, 20 and 23), the possibility exists that other sources of infor- mation during the thirty-one day announcement period may have been present and, therefore, the entire wealth valuation process of the exchange would not be encompassed in the nine day CAR's tested. All three periods do exhibit trends of movement in cumulative average residuals after the announcement date. An additional correlation analysis was performed comparing the standardized NPV calculations to the summed CAR's of the sample over the t_1 to t+15 time period. Table XXXI provides statistics on the analysis. 127 TABLE XXXI Spearman Rank Order Correlations Aggregated 16 Day CAR's Actual Exchange Results Mean Model After-tax Before—tax Discount Rate Discount Rate Spearman Probability Spearman Probability Period 1 Period 2 Period 3 Average 9.3024 .029 9.2837 .039 .0819 .318 .0448 .398 .0975 .281 .1329 .214 9.0118 .474 9.1378 .215 Adding the additional time frame did not enhance the proposed NPV/ residual relationship. In light of the significant responses during the three day announcement periods in the first and third periods, this result is not surprising. The equity market reacted consistently with the semi-strong form of efficiency and, therefore, it is reasonable to conclude that the valuation process was reasonably encompassed by the three day test periods. It is not unreasonable to assume the model is, at least, a suitable surrogate measure of the exchange's marginal monetary impact on firm value. The cash flow model does incorporate all objectively determinable cash flows associated with the bond exchange, although a certain degree of subjectivity in determining a few of the individual cash flows (exchange expenses for example) does exist. However, given the unexplained excess returns some additional factors are probably 128 being valued by equity investors. This conjecture applies in particular to the significant excess returns observed in the first announcement period. The lack of correlation when the largest economic effect on shareholder wealth is observed, when viewed in conjunction with the insignificant cumulative correlations, gives credence to this conjecture. What variable(s) is(are) impacting on shareholder wealth in period one is subject to further investigation. Summary The residual analysis found very significant positive abnormal returns in period one for the total and individual positive and negative portfolios. Results were consistent regardless of the discount rate used on cash flows or the research methodology employed, i.e. market or mean adjusted returns models. Correlations with these residuals and standardized NPV's were not significant, however. The period two and three residual analysis discovered no significant returns for the total portfolio in either period. However, when looking at the individual positive and negative standardized NPV portfolios, moderately signifi- cant offsetting residuals were discovered in period three. Correla— tions between period two and period three residuals with standardized NPVS'wenanot found to be significantly correlated. Correlations be- tween standardized NPVb and summed residuals over the three test periods, using the three day test period and a sixteen day period (t_l to ) were also performed. No highly significant correlations were t:+15 found. 10. 11. 12. 129 Chapter V 9 Footnotes As mentioned in Chapter IV, Allen and Hagerman [1980] provide evidence that the smallest prediction errors are obtained when using 250 to 750 daily returns in the expectations model. Studies include Fama Fisher Jensen and Roll [1969], Praetz [1972], Blattberg and Gonedes [1974], Jaffe [1974] among others. Normal distribution statistics were obtained from Statistical Methods, 7th Edition by Snedecor and Cochran. Ibid. Five percent and one percent significance levels for Z9scores are approximately 1.65 and 2.33 respectively. Thirty-six firms had their announcement of terms reported by the wall Street Journal. Additional information included in the terms of exchange announce- ments normally included the expected time frame of the exchange process and reasons the firm was exchanging bonds. Appendix A, Tables A96, A97 and A98 show individual firm residuals and statistics for Day t-1, t_0 and t+l respectively. In addition, Table A99 and associated Graphs A97, A98 and A99 give residuals and statistics for positive and negative NPV firms in period two based upon a before-tax interest rate on new debt being used as the discount rate. Table XI, Chapter III, lists the firms and the lapsed time between announcement dates. Similar results were realized in the market model analysis when after-tax and before-tax discount rates were used to calculate the NPV's. Additional sources of information would, for example, include financial analysts' forecasts, weekly business news publications and trade publications. The Pearson coefficient is: 2 (AR -Z§)(m 9-N'P—V) p - Sm/ - i m m _ [ 2 (AR _ fi2]1/2[z (m1 _ mgr/2 1-1 1 13. 14. 15. 130 The numerator (S ) is the product of the sum of the deviations from the mean of {Re residuals and NPV's of m firms, respectively. The product of the sum of deviations is divided by SrSn which makes the relationship independent of the standard deviations of AR and NPV. The Srsn is equal to the product of the variables, AR and NPV, standard deviations. To test the strength of the relationship the following test statistic is used. = —_—_ _ 2 t orn1/m-2 / /1 prn If t = positive 5 t(l9a; n92) then a significant positive relation- ship exists between the abnormal return (AR) and the net present value of the exchange (NPV). The correlation analysis was also conducted using a two day test period, to and t+ , with results consistent with the three day analysis. The raIionale behind the use of the two day test period is based on the author's belief that day t-l is the least likely day in which information concerning the exchange would be available and therefore impounded into the share price. This statement assumes the Spearman rank brder correlations are a better measure of association than the Pearson product moment correlations. Table A917 exhibits the reverse relationship when the Pearson correlation is used. The average market value of stock for the five trading days prior to the first announcement was used to standardize the NPV calcu- lation. Average market values for periods two and three were also separately used in the analysis. Results were consistent regardless of the market standardization method used. CHAPTER VI SUMMARY, CONCLUSIONS, RESEARCH CONTRIBUTION AND ADDITIONAL RESEARCH SUGGESTIONS Summary Previous research on stock market returns and their associa- tion with exchanges of securities has been primarily related to ex- changes between different classes of security holders.1 These forms of exchange result in a redistribution of wealth between the security classes. Bond for bond exchanges, however, involve only one class of security holder whose investment remains essentially equal before and after the exchange. Due to the corporate tax consequences of the exchange,such a transaction results in a net cash inflow or outflow to the individual firm. The purpose of this study was to determine the effects of the exchange on shareholder wealth and to see if any realized effects were related to proposed measures of net cash flows resulting from the exchange. The research employed both the mean adjusted return model and market model methodologies to calculate any effect on shareholder wealth resulting from the exchange announcements. Assumptions of a semi-strong form of market efficiency, as it relates to publicly available information, and the equilibrium pricing of common stocks being consistent with the capital asset pricing model were made. Firms selected for the study engaged in an exchange of their 131 132 outstanding discounted bonds during the seven year period 1973 through 1979. The sample consisted of forty firms. Periods of thirty-one days surrounding each of three public announcements of the exchange were chosen. The announcements related to the decisions of firms' board of directors to engage in the ex- changes, the terms of the exchange agreements, and the results of the exchanges, respectively. Direct testing of the day before, the day of, and the day after each announcement was conducted. These three day periods were chosen based upon evidence from similar research using public announcements of the speed of adjustment in share price. Once residuals were calculated, a Z9score was determined on each daily average residual. Subsequent to the determination of residuals, the relationship between the net cash flows and the average daily residuals were mea- sured in and over the three periods. Spearman rank order correlations were then determined to measure the degree of association between the two variables. Conclusions Testing for abnormal performance was conducted in each of the three announcement periods on the portfolio of sample firms. Results of these tests, performed on the total portfolio, showed significant abnormal returns in period one, when the exchange was originally announced. However, the possibility existed that offsetting wealth effects could have occurred due to the differential cash flow effects associated with the exchange. These offsetting wealth effects would result from investors reacting positively (negatively) to the positive 133 (negative) cash flows resulting from the exchange. Tests were there- fore conducted to detect abnormal performance on positive versus nega- tive NPV portfolios. Results showed that both portfolios earned sig- nificantly abnormal positive returns in period one and modest, offsetting abnormal returns in period three which were consistent with the sign of the cash flow calculation. These effects on shareholder wealth and their relationship, or lack thereof, with the NPV calculation were substantiated in the correlation analysis. No significantly positive correlations existed between abnormal returns and NPV in the three announcement periods. A further test was conducted to see if the cumulative returns over the three periods were related to NPV since the period two and three returns may have been adjustments to the initial abnormal performance in period one. Investors may not have enough information in period one to measure the actual cash flow effect of the exchange on share- holder wealth since the terms of exchange and actual cash flow results of the exchange are not available until the later announce- ments. No significant relationship was observed between those cumu- lative returns and the standardized NPV. Apparently,investors per- ceive factors other than those incorporated in the NPV calculation as having a greater effect on their wealth. In period one, where the significantly large excess returns are observed, these factors result in positive excess returns regardless of the cash flow calculation's sign. Factors which may have contributed to the observed market reaction can be addressed in light of several research papers referred to earlier in this study. Laber [1978] states, "managers appear to 134 refund discounted bonds because of paper gains and/or enhanced finan- cial ratios." These factors would not result in a significant shift in shareholder wealth in an efficient capital market unless some real economic effect on firm value resulted from these "paper gains and/or enhanced ratios." In relation to this study these economic effects, in terms of cash flows, would be significantly larger than the proposed cash flows and positive for all firms. Jensen and Meckling's agency theory provides a viable explan- ation of what these "economic effects" may be. Consistent with agency theory, reducing the book value of long-term debt and increasing stock- holders'equity ("paper gain") can shift wealth from the bondholder to stockholder if debt covenents are written in terms of capital struc- ture relationships. Greater flexibility may be realized by management regarding decisions concerning dividends, future debt issues and working capital maintenance. These potential effects could readily result in increased shareholder wealth and could certainly dwarf the net cash flows relating to the exchange. While the covenents of each bond issue were not directly reviewed, the reasons listed by each firm for exchanging their bonds were listed in Table V, Chapter III. Almost all firms who supplied this information listed "reduce long-term debt and increase stockholders'equity" as their main reasons for ex- change. These are two factors,referred to above in relation to agency theory, which could result in a positive shift in shareholder wealth. This is consistent with the results found in this study, the wealth effect being independent of the cash flows related to the exchange process. Unfortunately, the small sample size and the lack 0f differentiation of the reasons for exchange across firms does not allow 135 for testing of excess returns between listed reasons for exchange. However, the consistency between the independence and direction of excess returns observed and the combined agency theory and investment theory explanations of the observed market behavior is conclusive, the major fault being the inability, with this sample, to test the agency theory propositions. Research Contributions Implications of this study can be addressed from a theoretical, as well as, a practical perspective. In terms of capital structure theory, the results are consistent with those found by Masulis [1980] and Mikkelson [1981], when viewed from a wealth re-distribution per— spective. Where these authors associcated their positive returns with actual wealth re-distribution between classes of security holders, the wealth re-distribution implied in this study relates to proposed greater flexibility in management's decisions which impact upon share- holder wealth. This greater flexibility results from "book value" changes in one class of security. To test this conclusion in terms of M and M propositions, the relationship between any change in tax shield and abnormal performance should be tested. While the author recognizes that the tax shield is in fact one of the cash flows included in the NPV calculation, investors may be reacting to the bond for bond exchange like other exchanges, i.e., bond for stock. If so, an increase (decrease) in tax shield resulting from the exchange would result in an increase (decrease) in share price. Positive cor- relations found when using a before-tax discount rate to calculate the NPV supports this proposition. Since a greater portion of the 136 NPV would be associated with the change in interest payments when the higher discount rate is employed, the resulting NPV is more heavily weighted by the tax shield. This, however, is a topic for future investigation. Results as they pertain to investment theory are somewhat in- conclusive. While positive associations between NPV and excess returns existed when a before-tax discount rate was used, doubt exists as to when the cash flow information was impounded into share price and which discount rate was appropriate in measuring these cash flows. The fact that the returns aggregated over three periods were positively correlated with the before-tax NPV lends some credibility to the use of the before-tax discount rate and the market's cumulative impounding of the NPV information over the three announcement periods. However, the strength of this conclusion is suspect and subject to further investigation. A larger sample would be useful in testing this proposition since individual portfolios in this study were small. Practical implications of these results related to management's decision of whether or not to exchange discounted bonds and the GAAP relating to exchanges of discounted bonds. The analysis of market returns showed that exchanging discounted bonds result in an initial increase in shareholder wealth regardless of the proposed net cash flow effects of the exchange. While a shareholder reaction to cash flows appears when the exchange is completed, this wealth effect is considerably less significant than the initial reaction. It appears then that firms should exchange discounted bonds when it is practical to do so, with secondary consideration given to the cash flow impli- cations of the exchange. This statement assumes the company can 137 cover any incremental increases in interest payments and would benefit from a reduction in book value of long-term debt and an increase in stockholders' equity. In reference to GAAP, financial information concerning the classification of the gain (extraordinary item under FAS #4), other than being considered in the cash flow model, may not be relevant to at least the initial valuation of the exchange by shareholders. Infor- mation such as the exchanges effects on debt covenents, dividends and financial ratios may provide more useful information to investors. Additional investigations on managers'reasons for exchanging and the actual debt covenents of sample firms could provide evidence that would further verify these proposed reporting implications. Additional Research Suggestions Additional research suggestions apply to the testing of vari- ables which might better explain the observed security price behavior. In relation to shifts in shareholder wealth, the price behavior of debt issues, both the issue being proposed for exchange and other out- standing issues, could be examined to see if an effect on bondholder wealth existed that was opposite from that realized by shareholders. Its presence would give verification to the proposed shift in share- holder wealth. Actual debt covenents could also be examined and related to any increased flexibility realized by management in terms of dividend payments, debt capacity, and capital maintenance. A relationship between these variables, or close surrogates, to observed changes in shareholder wealth would also add substance to the conclusions proposed. 138 Finally, the tests included in this study, as well as those proposed above,would have greater inferential bearing if a larger sample could be developed. This problem can only be resolved by the continued use of the bond exchanges by corporations. 139 Chapter VI 9 Footnotes 1. See Masulis [1980] and Mikkelson [1981]. 2. Ibid. APPENDIX A 140 TABLE A91 Period 1 9 Mean Model Day T91 Cumulative Firm Firm Standard Standard Residual Residual-T Residual Allegheny Airlines (U.S. Air) .02179 .60962 9.81875 Allegheny Ludlum 9.02520 91.39110 2.66066 American Medicorp .03594 .90170 1.35480 Athlone Industries, Inc. 9.00066 9.04426 2.68693 Bay Colony Fin. Corporation .05360 .84466 .41650 Chase Manhattan MTG. .00045 .01064 9.80546 Chelsea Inds. Inc. .06752 1.98054 5.07809 Columbia Pictures Inc. 9.02383 9.38390 3.36007 Condec Corporation .03917 1.39240 91.08576 Cooper Labs Inc. 9.00212 9.05904 1.22930 Dillingham Corporation .00042 .01551 91.76353 Fairchild Ind. Inc. 9.01075 9.45802 1.94411 Fedders Corporation .04020 1.08916 1.70732 Fibreboard Corporation .00173 .07525 1.99412 General Host Corporation 9.01813 9.57835 91.44119 General Instruments 9.05282 91.28657 91.62426 Grumman Corporation .01693 .55523 .43887 Gulf & Western Industries, Inc. 9.02690 91.47297 91.37061 Insilco Corporation .00141 .05648 1.04783 Institutional Investors 9.04932 9.78259 2.56245 LTV Corporation .01239 .50698 .02428 McCulloch Oil .09076 2.39714 9.86186 M G M .00035 .01005 92.17322 Mohawk Data Sciences 9.04563 9.53208 9.66439 National Industries 9.03522 9.95657 91.70605 Pan Am .01442 .29909 2.04715 Pioneer Texas Corporation 9.02667 9.49029 91.65562 Pittston Co. .00069 .03580 9.11259 Ramada Inns Incorporated 9.06864 91.89028 .04901 Rapid American Corporation .03303 .79163 .89672 Roblin Industries, Inc. .00257 .06208 1.69022 Rusco Industries, Inc. 9.00294 9.04515 9.51985 Sanders Assoc. Inc. 9.08523 91.46016 91.34440 Texstar Corporation .03714 .87665 1.29476 UAL 9.00554 9.30265 9.56292 United Brands Co. .00019 9.00717 9.86682 Western Union Corporation .00876 .35543 91.15769 White Motor Corporation .02606 .59015 9.91700 Wickes Corporation 9.02264 9.83353 2.45583 Zapata Corporation .05006 1.75379 .07718 Mean .00132 .35224 9.54818 141 TABLE A92 Period 1 9 Mean Model Day To Cumulative Firm Firm Standard Standard Residual Residual-T Residual Allegheny Airlines (U.S. Air) 9.02526 9.70654 9.99539 Allegheny Ludlum 9.00104 9.05787 2.64619 American Medicorp .00469 .11785 1.38426 Athlone Industries, Inc. -.00066 9.04426 2.67586 Bay Colony Property .05067 .79858 .61615 Chase Manhattan MTG .05601 1.31180 9.47751 Chelsea Inds. Inc. .18598 5.45494 6.44183 Columbia Pictures Inc. 9.04555 9.73378 3.17663 Condec Corporation 9.00192 9.06826 91.10282 Cooper Labs Inc. 9.01527 9.42543 1.12294 Dillingham Corporation .00042 .01551 91.75965 Fairchild Industries, Inc. .06835 2.90953 2.67150 Fedders Corporation .02680 .72609 1.88884 Fibreboard Corporation .00173 .07525 2.01293 General Host Corporation .00109 .03494 91.43245 General Instruments .05159 1.25663 91.31010 Grumman Corporation 9.00108 9.03543 .43001 Gulf & Western Industries, Inc. .06754 3.69775 -.44617 ' Insilco Corporation .03083- 1.22760 1.35473 Institutional Investors 9.00386 9.06134 2.54711 LTV Corporation .01224 .50112 .14956 McCulloch Oil .13663 3.60841 .04024 M G M .09230 2.63833 91.51364 Mohawk Data Sciences .07770 .90599 9.43789 National Industries .03259 .88501 91.48480 Pan Am .01408 .29211 2.12018 Pioneer Texas Corporation .00342 9.06286 91.67134 Pittston Co. .04179 2.15580 .42635 Ramada Inns Incorporated .03736 1.02880 .30622 Rapid American Corporation 9.06811 91.63206 .48870 Roblin Industries, Inc. 9.04089 9.98451 1.44409 Rusco Industries, Inc. 9.00294 9.04515 9.53113 Sanders Assoc. Inc. .00171 .02946 91.33703 Texstar Corporation 9.03304 9.77990 1.09978 UAL .03987 2.17727 9.01860 United Brands Co. 9.02102 9.78090 91.06204 Western Union Corporation .02853 91.15698 91.44694 White Motor Corporation ~02545 .57635 9.77291 Wickes Corporation .00981 .36140 2.54618 Zapata Corporation .05730 2.00710 .57895 Mean .02079 4.289.4 6.84023 142 TABLE A93 Period 1 9 Mean Model Day T+l Cumulative Firm Firm Standard Standard Residual Residual-T Residual Allegheny Airlines (U.S. Air) “-00200 “-05620 "1-00902 Allegheny Ludlum 9.00104 9.05787 2.63215 American Medicorp .03500 .87795 1.59719 Athlone Industries, Inc. ~00720 -27817 2-79184 Bay Colony Property .14804 2.33297 1.18198 Chase Manhattan MTG 9.05217 91.22202 9.77389 Chelsea Inds. Inc. .00230 .06767 6.45824 Columbia Pictures Inc. -.02522 -.40628 3.07809 Condec Corporation 9.00192 9.06826 91.11938 Cooper Labs Inc, 9.04212 -1.17286 .83848 Dillingham Corporation .00042 .01551 -1.75589 Fairchild Industries, Inc. .03608 1.53588 3.04400 Fedders Corporation 9.03258 9.88264 1.67477 Fibreboard Corporation .02446 1.05939 2.26987 General Host Corporation ~00109 ~03494 ‘1-42398 General Instruments -.00197 “.04814 -1.32178 Grumman Corporation -.01878 -.61565 .28069 Gulf 8 Western Industries, Inc. -00980 '53665 '-31601 ' Insilco Corporation 9.01286 9.51234 1.23047 Institutional Investors 9.02767 9.43914 2.44060 LTV Corporation 9.91141 9.46718 .03625 McCulloch Oil .12133 3.20435 .81741 M G M 9.01017 9.29081 91.58417 Mohawk Data Sciences 9.04409 9.51414 9.56259 National Industries 9.00189 9.05138 91.49726 Pan Am .01376 .28537 2.18939 Pioneer Texas Corporation .00848 .15593 91.63351 Pittston Co. —.03877 -2.00050 9.05883 Ramada Inns Incorporated .00032 .00890 .30838 Rapid American Corporation 9.07287 . 91.74617 .06519 Roblin Industries, Inc. .00257 .06208 1.45915 Rusco Industries. Inc. 9.09385 91.43827 -.71001 Sanders Assoc. Inc. .04933 .84521 -1.13204 Texstar corporation .00143 .00384 1.10799 UAL 9.01159 9.63295 9.17212 United Brands Co. .01044 .38792 9.96796 Western Union Corporation 9.01030 9.41770 91.54825 White Motor Corporation 9.04655 91.05388 91.02852 Wickes CorPoration 9.01484 91.5463 2.41367 Zapata Corporation .00822 .28805 .64882 Mean .00236 9.28391 9.26423 TABLE A94 Positive/Negative NPV Fir-e Period 1 9 Before-Tex Discount Rate Mean Model Actual Exchange Negative NPV Iirle(17) Positive IPV Fir-8(23) 143 e '0 > I NIflOdFflthONOIflMNN—I—iO OOOBNOM cum—no gzrfi ~h~ho~nnnonoheo~¢~~o~~~on82nonc 1"; cah~0h0~°n~~m~~m°~nnhnnn~¢wn~no 3,4” “honochoomc¢oowtmvooscoODOHOnnN qaul N00~mm°~~00~~cnohm¢m0~¢~mn~o~nm ago eeeeeoeoeoeeeeeeeeeeoeeeeO‘eeooo We: ill III I c-I—I-u-I—Id—I—II-I—I 2 . _,0d n~~cnn~00n0¢¢ohonoonncn m a. 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I I I I I I I I «sundown—Islan— ONOa-IomoohnN—nonnnmcO-nOcnoaOI-nnh N0md—‘OOO‘0000FK‘0¢n¢NODNMNM¢ 0N0"): ~~6umn~¢0m0~ns¢m~uccomfi~nm0~~0c "0 DWNHO DIWMMMIVOMNNNM «on and“ than 00C 0000:) 'JOOUDOQOOOOOJOan-JOOOO J .0...OO'OOOOOOOOOOO0.00.00.00.00 wMuIfio-oc-INO‘O‘M000N1FJHMOBIMO¢OF|O~I00 UNOOOI\N¢NONmHOHOQOfi-D ONNNQNFNMN oand:n~~nqoocnnno~acocameonoooh (9 MIOuwaeeJNd'o-a—«rOod’SMNQOvtnurthv-‘u ans—“‘0 00 «ONJoNGIObn0-4CDFNOONOJNOO-O O0.0000000000000.000000000000'OO TI-t ITI AI INIIIWII II I upnuwmnI—«rhou‘nhtwUIIVNODca'JuINonIuOvO mmooomo—IOWONRI' OO—IOOO—Iw-«rhovw NI— avan—memoaoomo-ooeoM—unnmo 000m a-Icue—oo-noo—oosoon—oooo-«nnooooc—oo o0000130000000000000000000000000 0.00.00.00.00000000000000....0.. o Standard Cumulative Residuals Cueulstive score on Average Residuals Z ww— Average Average Residuals O OOOOOIUnIh—IIAUMOIP—eoo commune «no own: umuxmo-nhoceIoa-naoc'Na-INOIBOMMNOJOOO d-OAaOMO tnno'ahnoomcbccrnhopmo'h 3610.0 “NMIAOO0M0NnOONOJ‘OQMh‘IMOM—I-INOHN OMOCU’IOOO‘OOBFOOMOONOOnMnOOOFDO-fln eeeeqesoeoeeeeeeeeeeeeeeeeooeee I ‘ Hdo4Mflnd-m q... o-aNNOIn—IMNOOIAOH0ON00hOvl‘OQO ¢O~r00~fi uooen~c~v~huoo~~o~n~rd~o OH I och—«v.9 I'ENNMDQNIII\OMMOBOOFIMBQ.J\UJ0NOOCF‘O OOdNN—s—dafld—sflfiNflohnlfle’MMMuiIndiana‘s-Inn 0000000000 00000000000000 0 200000 OOOOOOOOOOOOOOOOOO0.00.0.0.0... I . '9 ch mnnmmmhmoflm when»: hereon-‘0 O—0ohBOfOOMNNOFON num0~r0um0nm ON 0 unmovrvrohnOONMc cufimuahn—Ioonmr-h q *nmch—a-nnoucvoonho one \OMV OotuINhId NC. I‘ONU‘HOQ omfihhham m0 DnMOOMOOO eoeeeeooeeoeeeeeeoeeeeeeseoeeoe I— Noll? I «MIII7 I TIJI I~~ “It!" CMH“U~OQNOCMU\~ 0"th WI€flI\J‘ ooomom~nnom~o~°hm~o~a~o¢-o~o~o 0tV€OMfl00NOMOOemeIflI~0NOON «MONOFUI 0d0d0000000000d~000—0000—000000-6 0000000000000 30000000000 0000000 eoooooooooooeeooooooooooeooeooo o «onto—I99 shoncmmancvmuohooo—owne In 9 I? «wflF'II II II I I I Ant-Inna. CUflUtflIIV£ “VERROE IESIOUHLS -IJ°BI 146 Graph #A94 1 QVE RESU.PERIODI.IOO 2 BEFORE T3!.HERN HODEL I.-“ ‘ . V M P. i AJ 1 ! \ ICU m 3. 3 8 no 8 I! ma > 3: 3 H ,8 a «on é IIflU 'V 1".“ V” n-IIIIII -—-lllflfi' Graph #A95 .5- tin! :QQ.'E*IOSI.IOO K SEFQQE TB!.HERN HOOEL .3407’ .OIIIO .MA W -m -w -:3I3 I II"! A V Z 53R. Graph #A96 'ERIOOI.;OO 2 BEFORE 'nx.nEdN HODEL l-SIDRE ON CUHUIR'IV! flVERflUI RESIDUHIS 147 TABLE A96 Period 2 9 Mean Model Day T91 Cumulative Firm Firm Standard Standard Residual Residual-T Residual Allegheny Airlines (U.S. Air) 9.04854 91.37730 92.52495 Allegheny Ludlum .00822 .44605 .21288 American Medicorp 9.07345 91.75058 91.55942 Athlone Industries, Inc. 9.00058 9.03913 1.32022 Bay Colony Property .03651 .71456 9.03188 Chase Manhattan MTG .00029 .00712 .88334 Chelsea Inds. Inc. .03437 .91330 9.00614 Columbia Pictures Inc. 9.04923 9.79133 .51828 Condec Corporation .00880 .33438 1.77388 Contin Investment Trust .01782 ..49558 94.36989 Cooper Labs Inc. 9.01689 9.46969 92.06575 Dillingham Corporation 9.03709 91.28587 9.66406 Fairchild Industries, Inc. .03853 1.57756 9.82924 Fedders Corporation 9.01768 9.43004 .02435 Fibreboard Corporation 9.04280 91.80287 1.06882 General Host Inc. .00128 .04030 9.59861 General Instruments .02673 .66002 1.73936 Gulf Western Inds. Inc. 9.00790 9.43240 .05096 Insilco Corporation .01578 .64313 .08816 Institutional Investors 9.00157 9.02600 9.55235 LVT Corporation .01421 .59667 91.34695 McCulloch Oil 9.01915 9.43085 91.53554 M G M .00045 .01230 9.90613 Mohawk Data Sciences 9.02649 9.32703 1.70772 National Industries .09892 2.68889 1.44849 Pan Am 9.08865 91.91265 91.30199 Pioneer Texas Corporation .01945 .37055 9.15323 Ramada Inns Incorporated 9.03424 9.97487 9.46043 Roblin Industries, Inc. .12686 2.55192 .92421 Rusco Industries, Inc. .06426 1.02271 .00504 Sanders Assoc. Inc. .00073 .01213 1.34025 Texstar Corporation .02134 .50328 1.46278 UAL 9.00589 9.32135 .40808 United Brands Co. .03980 1.48575 92.38117 Western Union Corporation 9.01950 9.79602 1.11177 Wickes Corporation .00086 .03206 92.37029 Zapata Corporation .05922 2.19885 1.55644 Mean .00391 .67818 9.98508 148 TABLE A97 Period 2 9 Mean Model Day To Cumulative Firm Firm Standard Standard Residual Residual-T Residual Allegheny Airlines (U.S. Air) 9.00168 9.09101 .19012 Allegheny Ludlum .00347 .08278 91.53873 American Medicorp 9.00833 9.58860 1.18057 Athlone Industries, Inc. .03898 9.76285 9.22259 Bay Colony Property 9.05526 91.32698 .55160 Chase Manhattan MTG .00047 .01249 9.00031 Chelsea Inds. Inc. .01209 .19435 .56686 Columbia Pictures Inc. --01236 9.46957 1.65649 Condec Corporation .24964 6.94168 92.63447 Contin Investment Trust ~02575 .71607 91.88674 Cooper Labs Inc. . 9.01896 9.65737 9.82840 Dillingham Corporation .00569 .23323 9.77094 Fairchild Industries, Inc. 9.00778 --18940 9.02299 Fedders Corporation .00863 .36344 1.15968 Fibreboard Corporation -00128 .04030 9.58854 General Host Inc. .01246 .30782 1.81631 General Instruments .00095 .05185 .06392 Gulf Western Inds. Inc. .00086 .03503 .09692 Insilco Corporation 9.00157 9.02600 9.55885 Institutional Investors .01404 .58949 91.19958 LVT Corporation 9.08784 91.97591 92.02952 McCulloch Oil 9.02868 9.78946 91.10350 M G M 9.02683 9.33119 1.62492 Mohawk Data Sciences 9.03138 9.85309 1.23522 National Industries 9.00355 9.07652 91.32032 Pan Am 9.00380 9.07250 9.17136 Pioneer Texas Corporation .03851 1.09621 9.18638 Ramada Inns Incorporated . .16853 3.39006 1.77173 Roblin Industries, Inc. 9.00240 9.03826 9.00452 Rusco Industries, Inc. 9.02629 9.43590 1.23127 Sanders Assoc. Inc. .02092 .49325 1.58609 Texstar Corporation .00106 .05771 .42250 UAL 9.03969 91.48195 92.75165 United Brands Co. 9.00203 9.05759 92.53935 Western Union Corporation .02021 .82479 1.31797 Wickes Corporation .02148 .79639 92.17119 Zapata Corporation 9.00952 9.35365 1.46803 149 TABLE A98 Period 2 9 Mean Model Day T+l Cumulative Firm Firm Standard Standard Residual Residual-T Residual Allegheny Airlines (U.S. Air) .00322 .17488 .23254 Allegheny Ludlum .00347 .08278 91.51865 American Medicorp 9.00058 9.03913 1.17108 Athlone Industries, Inc. .03651 .71456 9.04929 Bay Colony Property .05912 1.41971 .89593 Chase Manhattan.MTG .01686 .44813 .10567 Chelsea Inds. Inc. 9.01940 9.31189 .49122 Columbia Pictures Inc. 9.01247 9.47383 1.54157 Condec Corporation .05678 1.57896 92.25151 Contin Investment Trust “-03059 9.85034 92.09298 Cooper Labs Inc. 9.01935 9.67096 9.99114 Dillingham Corporation .00563 .23075 9.71497 Fairchild Industries, Inc. 9.01831 9.44540 9.13102 Fedders Corporation .00099 .04189 1.16984 Fibreboard Corporation .00128 .04030 9.57876 General Host Inc. 9.01438 9.35505 1.73020 General Instruments .02773 1.51759 .43199 Gulf Western Inds. Inc. .00086 .03503 .10541 Insilco Corporation 9.08491 91.40099 9.89864 Institutional Investors .00105 .04431 91.18882 LVT Corporation 9.02193 9.49333 92.14917 McCulloch 011 .04045 1.11339 9.83346 M G M .01055 .13023 1.65651 Mohawk Data Sciences .03017 .82008 1.43412 National Industries 9.00354 9.07652 91.33888 Pan Am .00756 .14399 9.13643 Pioneer Texas Corporation ~07289 2.07526 .31695 Ramada Inns Incorporated 9.09337 91.87826 1.31618 Roblin Industries, Inc. 9.00240 9.03826 9.01380 Rusco Industries, Inc, .00073 .01213 1.23421 Sanders Assoc. Inc. .00051 .01204 1.58901 Texstar Corporation 9.02691 91.46913 .06619 UAL 9.01425 9.53202 92.88069 United Brands Co. 9.02642 9.74963 92.72116 western Union Corporation .01427 ~58229 1-45919 Wickes Corporation .04127 1.52986 91.80014 Zapata Corporation .00925 .34357 1.55136 Mean .00141 .54184 9.62103 Standard Cumulative Residuals Cu-ulative Average Residuals Negative NPV Firms (1?) z score on Average Residuals Average Residuals 0 0 15C) “OMOONDMONOMOMFI‘OBOOI‘MQONOCIO NOOMMOOIh—IMQI-u-snfidoncchOhleu-Is-IMOM—I nFOHHnfiHOMWMNthI‘tO st #00010th cmnO—INcooo—ooonIOIVOcOnooOOhococ—I Mum—«n:cnnhonMIn~rnn~~00~mN~tNhhv~ .000..0.IOOOOOQOOOOOOOOOOQOOOOO 0hfin0000fi00hNfiNhkfionM¢thh€00m 0~~OOI9OOOhODOOONOOMqumh—Oo~00mr~ n000M¢3h~000N0fll‘m—NNOOOONMN—IMOO OHOnH—INNmmcOMMMMHOOHHO—In—IOu-I000 0000000000000000000000000000000 .0...OOOOOOOOOOO‘OOOOO000.000.... huncommnomooo-mc—Iooowon Mus-sh 00N0€MOMMO~OBOMMBOO0HMDHN «000“! some: I‘IhOOe-IOMNMMOFIOOHONM m—Ihs‘ «(broncocounnwmncnhooonONcfi ”coo O0M0H€¢00000ODOHHONfihnhONO “one COOOOOOOOOOOOOOOOQO 0.00.0.0... TFII I I TI I T? I I I Inc-II I omoowonsonmohs—ncoosnnmmoun Ousnoooho~hnoo~~60ncoutn00hh~o~ mahwcoohnc—uvnN—vcmuonmn00¢n0 M000000d0~0000-0~0000000—000 0000000000000000000000000000000 0.0.0.000...0.00.00.00.00...0.. Standard Cumulative “ Residubls TABLE IA99 Positive/Negative NPV Firms Period 2 9 Before—Tax Discount Rate Mean Returns Model Actual Exchange Average Cumulative Positive NPV Firmstil9) Average 2 score on Residue Average Residuals €000¢IflWMsWOOOONflI~IU€~0NM «no ON 0H0¢fiMNGDOflttmOFMOOQOMQQBNONflO0 .wnqmow oo~0~rap¢nnam Guru ”nomohooo O~000~o¢hnoo~nonwcOOIIINOOmeemoo nIOOJ‘RI—I-IF‘CONO cannons cs ew-o-Iomo-fi-DMN'D OOOOOOOOOOOOOOO...00.......0... 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RESOJERIOOZACYUBL BEFORE Humans none; .A I 5 .1“ j I i r IN MI M ~LN‘. 1 SIM! (III “film RISIDUIIIS ##1— '99999— 4 .51 :5 ES; __. ‘51.". l —IImu-i 4m ' 4 me: .. Graph #A—8 Graph #A99 'éi‘l-‘EQIDOZJCTUHL BEFORE YBIJIEQN "OOEL |Z-‘E‘NJE'IOOZJCVU‘IL BEFORE fflXJ‘IERN MODEL q - E /\ l .’ ; 2 x i °"°“ / \/\ f g I /f ! arm I, E Mn .' l 1 / s U \ V k U hmqu/\\ I E «a /\\ , 3 \j . 2 1 I » I: [\M :22 .s a -'. . TIME TIRE TABLE IA—lO Positive/Regative NPV Firms Period 2 9 Before-Tax Discount Rate Mean Returns Model 1001 Exchange Negative NPV Pirms(l6) Positive NPV Fir-8(20) Standard Cumulative Residuals Cumulative Z .0010 on Average Average Residuals Residuals Average Residuals 152 DeocQMNn~ho~s~suoovnco . "000*“ 3::z:::g:;2:g:089M0000~n¢fl0~gzg atommhomooo noumas0~non0nooo~ WWNMs’Mm'flNOfMflsfMONN 0.0.0....00000000....e~.m0~.“:n0m.~01€.:.0 M¢OQ~NN00hn¢COODBOH¢OMOOh¢¢0000 mm camcoumo—o c-IOOMNNDMNMOanI-I'Innus) n~n~o~o~o~oos~~m~~~~¢~¢omo~0coo CdOHdNMNNMVCMMMMNHOO~HOOHDOHOdfi cacaosoosooouoaooocooocooacooso nsnonoonono—)h~cvDhanhmoonudono unusn—onnsnmmnooa¢ammnno~n~omnh meoomobno~n000~~n~cmono~~~no~oh hnOO‘haommNhuNN—INAMU‘OOhhwv Samson's; canmcncoouaosoocmncnnun¢~h0~oo¢ ssOOOOOOOOOOOOOOOOOOOO0.0...0.. 7n I ?I IITT II IIdTI M0M0Ndnhhcbw0NMH0NhuvuflOONOflhcm MOON—MOFNO0NONOFGOODndOOOM~N000 coshannoomonnuncannannOnmvmonoo connooeooocsnoo00uuouoooooeo~oo 0900009000000000030000000000GOO 000.00.000-0000000000000.0.0.... Cumulative 2 score on Standard Cumulative Residuals Average Residuals Average Residuals Average Residuals nma~04~oqyoomovoww30¢onnmnn~nm~ noshchmhhooONs“macmswoonnmowmwh MNm3h30¢~~mfiflm~m¢0fi000fl~h0~3¢On :COMOMOHfiouDOmcoahooonhoJahthM annnu-nn~sno¢vndmmoonnhaohuoc 0000...... 0.00.000... O sssssssss IIIIIIIIIIIIIIIIIIIIIIHIIPIIdHP . 'I II nosso:o~seosuouo~cnw~uooomno~m¢ NON-WO¢¢erOODONOdMONtfiNOniftt one~no~onnocogmhnwonn~o~n0c¢0mq °°~Nn0d0HNJHNNddH-dNMmMNNNMN¢MM uaoooecoooaooocoocnouoooooococa OOOOOOOOOQOOOOOOOOOOOOOOOOOOOOOO v 0vonusm~s~o~on~nooonnnmnssahnOs ¢o~o~hn~¢oohco~0mnocoown~nnmn~m noscnmo~00mmaooo~mouooonmnconno 8 Joe OQNhsm—«uhco Jhmmo-ano-Idwcnhon OQNNJOdndONOC000F000n~n~n€h0050 00.0.0.0.....OOOOOOOOOOOOOOOOUO T T. I-Tldll I I TTINIII N 4 I HNNONOOéHONovflteMNunflOn0HN000~0 ~~~o~nsneoonh~o~nm~~o~m~ocmnboo omschnmnhhmo~o~~scae~~~n~oooOno Ofiuoooccacdooaooo:ocuoodaogouoo 03000000300030000fi9000000000000 0.00.00.00.000.00.00.00.0000000 MCMN~°OONOfi€MNfi°MNMOnONDO0HNM¢0 77d777IIIIIIIII dunfiqfi I (MRIIVE “VIEW RESIOIIIIIS 153 Graph #A910 1 “WE QESD.’ERIODZ-I00 7. BEFORE YRXJEWI 5005'. l i I I no I ‘C i d i 4 :3 .sn U 8 c C U 0 c E 3 ..m ~ I.” -I& --m one“! '1'“. Is I II b VINE Graph #A911 Graph #A912 “EERJERIOOZ-IOO 7. BEFORE Human none; 1,59'IJEQI302400 7. straws Humans noott I /\ m. /\ Ml” V V .-/\ ‘ 1-5:“: 0“ CWflIIV! IIIUIIIOE RISIIIUIIIS nus 'III’OI ~33!” I -3” -3” -m OK” *IC” car” 44‘ '= I I II «I -s I II .| . 154 Table lA—ll Period 3 9 Mean Return Model Day T91 Cumulative Standard Standard Firm Residuals Residual Residual Allegheny Airlines Inc. 9.00072 9.02150 .29878 Allegheny Ludlum Industries, Inc. 9.02996 91.64016 93.51163 American Medicorp. 9.02501 9.59041 91.87945 Athlone Industries, Inc. .00662 .44062 .96244 Bay Colony Property 9.04326 9.83549 9.53371 Chase Manhattan Mortgage 6 Realty Co. 9.00032 9.00765 91.1143 Chelsea Industries, Inc. .00093 .02507 1.29908 Columbia Pictures Industries, Inc. .02511 .40984 91.55198 Condec Corporation .01009 .37782 92.79251 Cooper Labs, Incorporated 9.01736 9.51045 91.65920 Dillingham Corporation 9.02085 9.67499 93.17991 Fairchild Industries, Inc. .00474 .21655 1.56756 Fedders Corporation ‘ .10701 2.53293 91.55047 Fibreboard Corporation 9.01486 9.62319 .63016 General Instruments 9.03257 9.85425 2.99024 Grumman Corporation .01119 .34794 91.25579 Gulf S Western Industries,-Inc. .03851 2.06037 1.17327 Insilco Corporation ’ .00074 .03038 .06714 Institutional Investors 9.00185 9.03031 .41559 LTV Corporation ‘ .01342 .57639 1.03484 McCulloch Oil Corporation .05772 1.26149 91.39481 MGM .03009 .82706 9.10125 Mohawk Data Sciences Corporation 9.00730 9.09419 91.09069 Rational Industries 9.03316 9.88918 .87837 Pan Am 9.02435 9.61562 9.13435 Pioneer Texas Corporation .01758 .33983 .01839 Ramada Inns .00096 .02832 1.30481 Rapid American Corporation 9.00112 9.02683 91.02390 Roblin Industries Inc. 9.09468 91.77775 .06962 Rusco Industries Inc. 9.00154 9.02582 .84529 Sanders Assoc Inc. 9.00013 9.00222 2.33981 Texstar Corporation 9.04791 91.11097 92.32746 UAL .01459 .78246 3.59989 United Brands Co. 9.05775 92.19922 9.53225 Western Union Co. .01079 .43603 95.46022 White Motor Corporation .08832 2.19098 91.11949 Wickes Corporation 9.01744 9.64752 1.37522 Zapata Corporation 9.01001 9.37158 1.50528 Mean 9.00115 9.10755 91.59051 Allegheny Airlines Inc. Firm 2155 Table “-12 ' Period 3 9 Mean Return Model Day To Allegheny Ludlum Industries, Inc. American Medicorp. Athlone Industries, Inc. Bay Colony Property Chase Manhattan Mortgage 5 Realty Co. Chelsea Industries,Inc. Columbia Pictures Industries, Inc. Condec Corporation Cooper Labs, Incorporated Dillingham Corporation Fairchild Industries, Inc. Fedders Corporation Fibreboard Corporation General Instruments Grumman Corporation Gulf & Western Industries, Inc.” Insilco Corporation Ins titutional Investors LTV Corporation McCulloch Oil Corporation Mohawk Data Sciences Corporation National Industries Pan Am Pioneer Texas Corporation Ramada Inns Rapid American Corporation Roblin Industries Inc. Rusco Industries Inc. Sanders Assoc Inc. Texstar Corporation UAL United Brands Co. Western Union Co. White Motor Corporation Wickes Corporation Zapata Corporation Mean Average Residual 9.00072 .02703 .03297 9.02351 .04189 9.00032 .01732 9.01923 .00994 .01317 9.08653 9.00225 9.02449 9.04737 .01805 9.03715 9.02649 .00074 .07507 .00092 9.07325 .08640 9.00730 .03035 9.00109 9.04671 .00096 9.00112 .14495 9.00154 9.02286 9.00029 9.09189 .00022 9.01980 .00137 9.04609 .03707 .00082 Standard Average Residuals 9.02150 1.47955 .77818 91.56473 .80903 9.00765 .46654 9.31396 .37204 .38737 92.80090 9.10272- 9.57979 91.98649 .47346 91.15512 91.41745 .03038 1.22917 .03952 91.60104 2.37415 9.09419 .81387 9.02767 9.90309 .02832 9.02682 2.72159 9.02582 9.38146 9.00686 91.91487 .00835 9.79990 .03393 91.71145 1.37546 Standard Cumulative Mel. .29340 93.14174 91.68491 .57126 9.33145 91.11625 1.41571 91.63047 92.69950 91.56236 93.88014 1.54188 91.69542 .13354 3.10861 91.54457 .81891 .07473 .72289 1.04472 91.79507 .49229 91.11424 1.08184 9.14127 9.20738 1.31189 91.03061 .75002 .83884 2.24444 92.32918 3.34618 9.53017 95.66020 91.1110 .94735 1.84915 91.71672 Table IA913 Period 3 9 Mean Return Model Day T + 1 Average Firm Residual Allegheny Airlines Inc. 9.00072 Allegheny Ludlum Industries, Inc. .00374 American Medicorp. .00356 Athlone Industries, Inc. .02981 Bay Colony Property .00159 Chase Manhattan Mortgage & Realty Co. 9.00032 Chelsea Industries, Inc. 9.01519 Columbia Pictures Industries, Inc. 9.04886 Condec Corporation 9.02679 Cooper Labs, Incorporated .01294 Dillingham Corporation .09566 Fairchild Industries, Inc. 9.03003 Fedders Corporation 9.05302 Fibreboard Corporation " .00101 General Instruments .01763 Grumman Corporation 9.01350 Gulf 6 Western Industries, Inc. .01947 Insilco Corporation - - .04762 Institutional Investors 9.07328 LTV Corporation .01326 McCulloch Oil Corporation 9.02411 MGM .01823 Mohawk Data Sciences Corporation 9.03003 National Industries 9.06441 Pan Am .02271 Pioneer Texas Corporation 9.02638 Ramada Inns .07239 Rapid American Corporation 9.00112 Roblin Industries Inc. 9.06041 Rusco Industries Inc. .06512 Sanders Assoc Inc. 9.00013 Texstar Corporation .09970 UAL .00107 United Brands Co. 9.01516 Western Union Co. .04216 White Motor Corporation .10137 Wickes Corporation .01098 Zapata Corporation 9.00067 Mean 156 .00507 Standard Average Residuals 9.02150 .20500 .08397 1.98419 9.03072 9.00765 9.40928 9.79752 91.00335 .38052 3.09632 91.37096 91.25506 .04236 .46254 9.41992 1.04154 1.93876 91.19984 .56976 9.52696 .50095 9.38725 91.72720 .57427 9.51004 2.12408 9.02683 91.13422 1.08924 9.00222 2.31176 .05773 9.5775 1.70336 2.51450 .40780 9.02479 1.56112 Standard Cumulative Residuals .28819 93.09202 31.66454 1.05249 9.33890 91.11811 1.31645 91.82390 92.94285 91.47007 93.12917 1.20937 91.99981 .14381 3.22079 91.64641 1.07152 .54495 .43188 1.18298 91.92288 .61379 91.20816 .66293 9.00199 9.33108 1.82705 91.03711 .47493 1.10302 2.24391 91.76849 3.36018 9.67023 95.24707 9.50114 1.04626 1.84314 91.33809 TABLB’IA914 Positive/Negative NPV Pirms Period 3 9 Before Tax Discount Rate Mean Returns Model Actual Exchange negative NPV Pirma(l7) Positive NPV Pirms(21) Standard Cumulative Residuals Cumulative Average Residuals Standard 2. score on Cumulative Residuals Cumulative Z ICOI‘Q OI'I Average Residuals Average Residuals Average Residuals Average Residuals Average Residuals m 157 o-o~nconwohohno~o¢~m~w¢oo¢oo~n oo~o~nonooa~~h~ococoochnoonou- finch~o~n00~~000nosmuasmn0¢¢~0¢¢ ~ncn¢oo~hoo~nooo~o¢m~n~~~hho~on nunnnmonknwsocomobaboon—awnheoa OOOOOOOQOOOOO...OOOOOOOOOOOOOOO Illllllllllu-~~-~n~~mn~~-~~~ ° IIOIIIIIIIIIIIIIIIIC no:v-hococooc°¢ooo-0o~n~0090c Duo—oocn~oonn~annhouncn~m¢conoo MOOODJFONNOOOONflOONNhOhN¢QMNNMO oocoooOONu~c~~e¢ono~oo~hcnooccc cocooooooaooooaooooooo590000000 O...OOOOOOOOOOOOOO00.00.0000... caNhOOOunhhoOonooooncnaoOOOOOhw anooc«n00h~n~oo~~hn~50000omqo- né03¢0h~cnhocn00hethnncwhm~acnm NHOOFNOOOOONMMOOthOOQuNéocnnfé* no¢000h30non~a~co°~nc~noco~o~oo 0.000.0000000000000000000000000 I! ll ll7d7?~l7d?fi70 7 ~~7ldlt - I nu:abonoooouonnnuo-0h¢~uJoanne OMNGOdOOOMOOuuflnthnOOOn‘connON mannaowom¢~nco~n~oonnqonhowoo~u ooocoooo~uo~uo~o~~oaooo¢~oooaoo ooooooocooooooooooooocooooooooc 0......000......OOOOOOOOOOOOOQOO ObnOONODChNVON—OnnnnoccnoomnOnu hehtDnMOoOhc—NNMOOHONCMcomchonn hoeafich00¢wnoocnohh0h0-0nhnmow hano¢o¢OcN~hNNonesunOMMOOOOONON OHdMOOMNQMOhOOHMONBOMDBBHHOO—ON 0.0.0.0000...0.060000000000000. 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I HR! 159 TABLE A-lS Period 1 Pearson Product Moment Correlations Mean Model Returns After-tax Before-tax Discount Rate Discount Rate Pearson's Probability Pearson's Probability 100% Exchange t 9 l 9.0171 .458 .1167 .237 t + 1 9.3127 .025 9.1716 .145 Average 9.1503 .177 9.0416 .399 Actual Exchange t - 1 9.0394 .405 .2299 .077 t 0 9.9875 .296 9.0732 .327 t + 1 9.3382 .016 9.1188 .233 Average 9.2193 .087 9.0031 .492 160 TABLE A916 Period 2 Pearson Product Moment Correlations Mean Model Residuals After-tax Before-tax Discount Rate Discount Rate Pearson's Probability Pearson's Probability 100% Exchange t 9 l 9.0780 .326 9.0466 .394 t + 1 .2317 .087 9.2758 .052 Average .1628 .168 .3692 .012 Actual Exchange t 9 1 9.0400 .408 9.0127 .471 t 0 .1522 .188 9.0761 .330 t + 1 .0963 .288 .2071 .113 Average .1740 .151 .5036 .001 161 TABLE A917 Period 3 Pearson Product Moment Correlations Actual Exchange Results Mean Model Residuals Pearson's Probability Before-tax Discount Rate t 9 1 9.1281 .222 t 0 .1167 .243 t + 1 9.0284 .433 Average .0593 .360 After-tax Discount Rate t 9 1 9.1415 .198 t 0 .0343 .419 t + 1 .0477 .388 Average .3283 .021 162 TABLE A918 Pearson Product Moment Correlations Aggregated Correlations Actual Exchange Results Mean Model Residuals Pearson's Probability After-tax Discount Rate t 9 1 9.1531 .190 t 0 .0242 .445 Average 9.1396 .212 Before-tax Discount Rate t 9 l .0364 .418 t 0 .0577 .371 t + 1 .1083 .268 Average .1210 .244 163 TABLE A919 Pearson Product Moment Correlations Aggregated 16-Day CAR's Actual Exchange Results Mean Model Residuals After-tax Before-tax Discount Rate Discount Rate Pearson's Probability Pearson's Probability Period 1 Period 2 Period 3 Average 9.1565 .167 9.2255 .081 .0558 .373 9.0543 .376 9.0401 .406 .0080 .481 9.0597 .367 9.0865 .311 APPENDIX B 1154 Table 8891 Statistics on Residuals Firm Allegheny Airlines Inc. Allegheny Ludlum Industries, Inc. American Medicorp. Athlone Industries, Inc. Bay Colony Property Period 1 Market Model Studentized t Chase Manhattan Mortgage & Realty Co. Chelsea Industries, Inc. Columbia Pictures Industries, Inc. Condec Corporation Cooper Labs, Incorporated Dillingham Corporation Fairchild Industries, Inc. Pedders Corporation Fibreboard Corporation General Host Corporation General Instruments Grumman Corporation Gulf & Western Industries, Inc. Insilco Corporation - Institutional Investors LTV Corporation MtCulloch Oil Corporation MGM Mohawk Data Sciences Corporation National Industries Pan Am Pioneer Texas Corporation Pittston Company Ramada Inns Rapid American Corporation Roblin Industries Inc. Rusco Industries Inc. Sanders Assoc Inc. Texstar Corporation UAL United Brands Co. western Union Co. White Motor Corporation Wickes Corporation Zapata Corporation Mean 3.728 5.013 3.669 4.015 4.146 3.672 4.756 4.558 3.896 4.965 5.207 4.504 5.945 4.000 4.810 4.525 4.485 5.518 3.845 4.047 4.766 3.674 4.586 3.862 3.810 5.071 4.097 5.018 3.943 4.292 4.511 4.597 4.132 4.255 3.540 4.225 4.161 5.254 4.585 4.675 4.408 Kurtosis 2.093 6.069 1.894 2.393 2.544 2.658 4.189 4.044 2.116 5.472 4.203 3.028 5.692 2.500 3.474 2.721 2.955 9.765 2.358 2.931 3.042 2.424 3.622 2.066 2.029 3.564 2.571 4.985 2.169 3.771 2.954 3.575 2.298 2.653 2.048 2.764 2.376 7.784 3.123 4.456 3.434 m 9.063 1.424 .106 .023 .212 .031 1.032 1.017 .061 1.053 .600 .439 .573 .337 .281 -.191 9.196 2.17 -.252 .589 .206 .747 -.349 .206 .263 .298 -.354 .978 .295 -.970 .204 .656 .435 -.225 .288 .675 .109 ' 1.804 .531 9.960 .352 165 Table #392 Statistics on Residuals Period 2 Market Model Firm Allegheny Airlines Inc. Allegheny Ludlum American Medicorp Athlone Industries,Inc. Bay Colony Property Chase Manhattan Mortgage & Realty Co. Chelsea Industries, Inc. Columbia Pictures Industries, Inc. Condec Corporation Continental Investment Trust Cooper Labs, Incorporated Dillingham Corporation Fairchild Industries, Inc. " ' Fedders Corporation Fibreboard Corporation General Host Corporation General'Instruments - ' - Gulf 5 Western Industries, Inc.‘ ' Insilco Corporation Institutional Investors LTV Corporation McCulloch Oil Corporation MGM Mohawk Data Sciences Corporation National Industries Pan Am Pioneer Texas Corporation Ramada Inns Roblin Industries Inc. Rusco Industries Inc. Sanders Assoc Inc. Texstar Corporation UAL United Brands Co. western Union Co. Wickes Corporation Zapata Corporation Mean Studentized t 3.875 4.411 4.495 4.626 4.133 2.915 4.695 4.345 6.015 5.97 3.578 4.681 5.106 4.701 4.618 4.660 4.246 5.284 4.996 , 4.436 5.556 3.311 4.957 4.103 5.258 5.080 4.253 3.799 3.997 4.118 4.173 4.602 4.155 4.282 4.643 4.031 4.469 4.501 Kurtosis 2.359 3.559 2.807 4.340 2.552 1.82 3.304 2.934 10.022 7.689 2.245 4.615 3.705 3.537 2.955 3.542 2.941 6.244 4.326 3.138 7.018 1.877 3.480 3.288 4.849 42041 3.276 2.445 2.670 2.560 2.525 3.230 2.595 3.166 3.602 2.180 3.868 3.656 Skewness .249 9.835 . 306 1.050 .472 .026 -.471 .323 2.017 1.128 .357 1.275 -.039 .551 .041: -.412 .375 1.485 .901 .404 1. 398 -.134 -.430 .746 . 703 -.428 .815 .451 -.149 .291 . 277 9.089 .536 .124 9.671 9.046 1.105 .370 1156 Table #893 Statistics on Residuals Period 3 Market Model Firm Studengized t Kurtosis Skewness Allegheny Airlines Inc. 4.152 3.011 .631 Allegheny Ludlum Industries, Inc. 4.714 3.280 9.211 American Medicorp. 4.104 2.510 .265 Athlone Industries, Inc. 4.109 3.219 .799 Bay Colony Property 4.081 2.376 .310 Chase Manhattan Mortgage & Realty Co. 3.164 2.239 .035 Chelsea Industries, Inc. 4.409 3.187 .349 Columbia Pictures Industries, Inc. 3.828 2.283 .111 Condec Corporation 3.953 2.261 --.151 Cooper Labs, Incorporated 4.687 4.643 1.091 Dillingham Corporation 4.434 3.333 .989 Fairchild Industries, Inc. 4.252 2.548 9.088 Pedders Corporation 4.535 3.730 . .617 , Pibreboard Corporation ' 4.603 3.037 9.148 General Instruments 4.049 2.681 .663 Grumman Corporation ‘ 4.156 2.449 .016 Gulf & Western Industries, Inc. 5.768 . 6.637 91.076 Insilco Corporation -- '~ 4.661 3.938 .533 Institutional Investors ‘ ' 4.117 3.004 .476 LTV Corporation ' ' 5.762 8.636 1.709 McCulloch Oil Corporation 4.318 4.046 1.104 MGM 4.935 4.446 .768 Mohawk Data Sciences Corporation 3.593 1.886 .159 National Industries 4.899 5.239 1.211 Pan Am 3.641 1.952 .193 Pioneer Texas Corporation 4.125 3.462 .971 Ramada Inns 3.898 2.849 .610 Rapid American Corporation 4.071 2.647 .043 Roblin Industries Inc. 4.703 3.259 .204 Rusco Industries Inc. 3.990 2.387 .413 Sanders Assoc Inc. 4.632 3.870 .924 Texstar Corporation 3.998 2.211 9.096 UAL 4.810 3.476“ .333 United Brands Co. 4.887 4.502 .808 Western Union Co. 5.082 4.150 9.622 White Mbtor Corporation 3.573 2.042 .385 Wickes Corporation 3.936 2.157 9.244 Zapata Corporation 4.964 6.012 1.509 Mean 4.156 3.410 .448 167 TABLE B94 Period 1 9 Market Model Residuals Standard Standard Day Average Average Cumulative Residuals Residuals Residuals 915 9.00496 9.47940 9.47940 914 .01103 1.97602 .91786 913 9.00085 9.27599 .75851 912 .01278 1.99440 1.75571 911 9.00051 .02947 1.76889 910 .00197 .57801 2.00487 9 9 9.00309 9.79846 1.70307 9 8 9.00498 91.23281 1.26721 9 7 .00337 .49491 1.43218 9 6 .00429 1.03429 1.75925 9 5 .00210 .32114 1.85608 9 4 9.00399 9.18362 1.80307 9 3 .00569 1.20330 2.13681 9 2 .00457 1.15508 2.44552 9 1 9.00121 9.13528 2.41059 0 .01904 4.19079 3.45829 1 9.00109 9.29553 3.38661 2 9.00449 9.92963 3.16749 3 9.00458 9.31688 3.09479 4 9.00788 91.44853 2.77089 5 .00593 1.25404 3.04454 6 .00039 .01206 3.04712 7 .00844 1.52320 3.36473 8 9.00972 91.86668 2.98369 9 .00144 9.27443 2.92880 10 .00338 .45497 3.01803 11 9.00795 91.33501 2.76111 12 9.00281 9.49018 2.66847 13 9.00116 9.60106 2.55686 14 .01432 2.97334 3.09971 15 .00175 .70114 3.22564 168 Graph #B—l N -5CORE AVERRGE RESIOUBLS.PERIOO 1.nsanE’ HOUEL ‘ l I I l ..IAM 18 V l-SCORE 0N “VIRROE RESIDUfltS -.m |Jflfll -82” -MI ' _ 16 9 " . "HE Graph #892 Graph #B93 M‘_CUH OVE QESOS.'ERIOD l-flBIKEI HOOEL iziFORE CUfl EVE RESOS.'ERIOO l.HQRKEY "DUEL / ,7 ..... J I-BCOII 0M CUflUlfl'lVE 006800! RESIDUfltS CUflUlfllIVE IVERROE IESIOUHIS «usaay hlIU .6110. J” m I701 nus-7 ‘13.. cunt. . _ -2“ ~10 8 II ll 3 [g I . VIM! 71R! 169 TABLE B95 Period 1 9 Market Model Day T91 Cumulative Firm Firm Standard Standard Residual Residual-T Residual Allegheny Airlines (U.S. Air) .01184 .34609 .39089 Allegheny Ludlum 9.01391 9.82488 2.69634 American Medicorp .02942 .77052 .83999 Athlone Industries, Inc. .00230 .15888 3.83234 Bay Colony Property .06665 1.07398 9.87380 Chase Manhattan MTG 9.00048 9.01126 9.64414 Chelsea Inds. Inc. .06996 2.16971 5.25123 Columbia Pictures InC- 9.04094 9.68404 3.51415 Condec Corporation .02305 .87070 1.07022 Cooper Labs Inc. 9.00362 9.10276 1.15930 Dillingham Corporation 9.00380 9.14039 91.50196 Fairchild IndustrieS, Inc. 9.01270 9.55817 2.44288 Fedders Corporation 9.02290 9.70568 1.36247 Fibreboard Corporation 9.00200 9.09287 .84052 General Host Corporation 9.01116 9.28122 9.28210 General Instruments 9.05586 91.62477 91.37332 Grumman Corporation .02382 .84594 .15330 Gulf & Western Industries, Inc. 9.02120 91.28954 91.24790 Insilco Corporation .00018 .00769 .78060 Institutional Investors 9.03802 .61145 2.32440 LTV Corporation .00088 .04230 9.95501 McCulloch Oil .07471 2.07899 1.58117 M G M .00080 .02375 91.82638 Mohawk Data Sciences 9.04778 9.56617 9.51118 National Industries 9.01661 9.44447 9.96418 Pan Am .01138 .24636 2.08021 Pioneer Texas Corporation 9.02864 9.52765 91.35994 Pittston Co. 9.00274 9.16027 .67779 Ramada Inns Incorporated_ 9.05781 91.65570 9.13009 Rapid American Corporation .03690 .88985 .92700 Roblin Industries, Inc. ' 9.00226 9.05606 1.22236 Rusco Industries, Inc. 9.01377 9.21119 9.51398 Sanders ASSOC. Inc. 9.05764 91.03918 91.28262 Texstar Corporation . .03733 .90028 1.26924 UAL 9.00612 9.39120 1.19343 United Brands Co. 9.00379 9.14712 9.49510 Western Union Corporation .00208 .09144 9.49004 White Motor Corporation .00492 .11575 9.67961 Wickes Corporation 9.02642 91.07705 2.27976 Zapata Corporation .04501 1.81239 91.37630 Mean 9.00121 9.13528 2.41059 170 TABLE B96 Period 1 9 Market Model Day To Cumulative Firm Firm Standard Standard Residual Residual-T Residual Allegheny Airlines (U.S. Air) 9.01587 9.46425 9.50695 Allegheny Ludlum 9.00579 9.34464 2.61018 American Medicorp 9.01322 9.34506 .75373 Athlone Industries, Inc. .00091 .06284 3.84806 Bay Colony Property .08634 1.37874 9.52911 Chase Manhattan MTG .06009 1.40742 9.29229 Chelsea Inds. Inc. .17332 5.36378 6.59217 Columbia Pictures Inc. 9.06542 91.09230 3.24107 Condec Corporation 9.00288 9.10924 91.09754 Cooper Labs Inc. 9.00897 9.25428 1.09573 Dillingham Corporation 9.00690 9.25392 91.56545 Fairchild Industries, Inc. .05768 2.52197 3.07337 Fedders Corporation 9.01938 9.60223 1.21191 Fibreboard Corporation 9.00799 9.36864 .74836 General Host Corporation .01580 .53834 9.14751 General Instruments .03522 1.02373 91.11738 Grumman Corporation .00648 .23011 .21083 Gulf & Western Industries, Inc. .06136 3.73140 9.31505 Insilco Corporation .01399 .59004 .92812 Institutional Investors .01772 .28376 2.39534 LTV Corporation .00265 .12644 9.92339 McCulloch Oil .12804 3.56986 9.68870 M G M .08219 2.41582 91.22242 Mohawk Data Sciences .06609 .78245 9.31356 National Industries .04833 1.33687 9.62996 Pan Am .00734 .15891 2.11993 Pioneer Texas Corporation 9.00612 9.11278 91.38813 Pittston Co. .05211 3.03199 1.43579 Ramada Inns Incorporated .05822 1.65934 .28474 Rapid American Corporation 9.05893 91.41540 .57315 Roblin Industries, Inc. 9.04952 91.22394 .91637 Rusco Industries, Inc. .00210 .03234 9.50589 Sanders Assoc. Inc. .00763 .13802 91.24811 Texstar Corporation 9.02627 9.63294 1.1110 UAL .03053 1.94774 1.68036 United Brands Co. 9.01974 9.76626 9.68667 Western Union Corporation 9.01225 9.53510 9.62382 White Motor Corporation 9.00475 9.11106 9.70738 Wickes Corporation .02474 1.00600 2.53127 Zapata Corporation .04693 1.88841 9.90420 Mean .01904 4.19079 3.45829 171 TABLE B97 Period 1 9 Market Model Day T+1 Cumulative Firm Firm Standard Standard Residual Residual-T Residual Allegheny Airlines (U.S. Air) 9.00283 9.08291 9.52706 Allegheny Ludlum 9.00849 9.50524 2.48764 American Medicorp .04050 1.06089 1.01103 Athlone Industries, Inc. .01244 .85701 4.05591 Bay Colony Property .14242 2.29761 .02813 Chase Manhattan MTG 9.05067 91.18894 9.58065 Chelsea Inds. Inc. 9.00470 9.14578 6.55682 Columbia Pictures Inc. 9.01315 9.21996 3.18772 Condec Corporation 9.00908 9.34442 91.18107 Cooper Labs Inc. 9.03692 91.04702 .84178 Dillingham Corporation .00930 .34150 91.48262 Fairchild IndustrieS, Inc. .02681 1.17399 3.35811 Fedders Corporation 9.03108 9.97548 .97532 Fibreboard Corporation .02001 .92503 .97271 General Host Corporation 9.00366 9.12502 9.17784 General Instruments 9.00476 9.13861 91.15100 Grumman Corporation 9.01037 9.36818 .12153 Gulf & Western Industries, Inc. .00291 .17699 9.27212 Insilco Corporation 9.01893 9.80262 .73345 Institutional Investors -.00920 9.14754 2.35956 LTV Corporation 9.02314 91.10070 91.19035 McCulloch 011 .11525 3.21471 .09097 M G M 9.00661 9.19494 91.26970 M0h8Wk Data Sciences 9.04607 9.54584 9.44795 National Industries -.01394 —.38655 -.72371 Pan Am .02374 .51326 2.24440 Pioneer Texas Corporation .01354 .24918 91.32770 Pittston Co. 9.02120 91.22836 1.13786 Ramada Inns Incorporated_ .02171 .61861 .43478 Rapid American Corporation 9.07191 91.73519 .15231 Roblin Industries, Inc. -.00729 9.18009 .87269 Rusco Industries, Inc. 9.09924 91.52580 9.87596 Sanders Assoc. Inc. .05198 .94041 91.02003 Texstar CorPoration .00227 .05486 1.12431 UAL 9.02392 91.52395 1.31075 United Brands Co. .01281 .49738 9.56603 Western Union Corporation 9.01644 9.72116 9.79873 White Motor Corporation —.04070 9.96012 9.94024 Wickes Corporation .00609 .24732 2.59125 Zapata Corporation .02866 1.15030 9.62521 Mean 9.00109 9.29553 3.38660 TABLE 8898 Positive/Negative NPV Pirms Period 1 9 After-Tax Discount Rate Market Model Actual Exchange Negative NPV Firms (10) Positive NPV firms (30) Standard Cumulative Residuals Standard 2 score on Cumulative Cumulative Residuals ———-__ Cumulative z score on Average Average Residuals Residuals Average Residuals Residuals Average Average Residuals -—-————————-—_ Average Residuals E1 .chestnuhcehhonn~o~~~o~momm° 172 NOONNOM‘OHdfidOO—IOMOO¢OFOGONMOBN¢K ONNNe-IDOOOOOO'IM‘OM'NIOdOMM‘FFDODMOQm “I‘NOVI‘OMMONFOOMDNNGHOOePMHNNOP'D-n oQDBMQFOOFOOIBOONNNOMDLNOFOHO‘OONF nNmnonNONn—o—OmwthOOOmDOODOONOOm OOOOOOOOOOOOOOOOOOOOOOOOOOOOOCO II II dddflflddNfldfiflfiflflfi ONO O‘HNNOO’sflOOFONC'MOODOMOM—DMNOM0t e9 MOPHONU‘NM"MNNNm¢0-¢OF°°ND€Q¢NNO O Udf‘OIfiODOOIflNMQHOMOFU‘NQI‘OOU““NM" OCHOOHOOCOHOOF‘NQI OOK‘MMU‘O‘DQ CMMM‘ OOOOOOOOOOOOOOOOOOOOOOOOGOOOOOO OFOODFMOOGFOtohM¢tohoonNMOMO¢Mfi OOHMOOONONMMM‘denNOOODOOOI‘N—fil fidfOlfifHOOO‘NNerh—IOOBNMM‘OI‘DNQFINNNI‘ "NNOOdOMOFONOONOO¢MONONH¢Obnncn ONNOMOOOONOOM‘HMODFOONODOOMNGOOC‘ ..OOOOOOOOOOOOOOOO0.00.00.00.00 Ilfllllld? 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ONIN llTnnI u IMIT l—T—N 7 an I OOOGOOOOOOOOOOOOOOOOOOOOOOOOOOC mtnunOOohoncMNdO—Nncnchoocnuncn 77TTTT""""' "F”“'“ (menu filflflflf RESIOURIS 173 Graph #B94 1 OVE QESO.’ER!001-9CVURL “PIER 'RX.HQRKE' HOOEL L.“ F9 l-SCORE M ““8806 RESIDURI'S MEI! 9'88. 9-8laas- '99“, -z... 40 -s s ' TIRE Graph #895 Graph #396 ‘gl‘fJERIOOIACYURL RFYER MLHGIKET MODEL 5 gnv'ERIOOI-‘ICTURL agree YflX.flfl!KEY HOOEL W l\ W 3..“ f a.“ 1.0"! r saw 1 1d .01“ 196608! N CWMIIVE mance. RfSlOUfllS ' Y c-guu -1em { -... -.... ’5" - m. "5 '9 Is ."' -Is 9 1s s - rzng rlnt TABLE .899 Positive/Negative NPV Firms Period 1 9 After-tax Discount Rate Market Model 1002 Exchange Negative NPV Firms (ll) Positive MP? Firms (29) Standard Cumulative Residuals Cumulative Z score on Average Residuals Average Residuals Average Residuals 2174 Mat wome¢mnr~~r~r~rnnhmowsu ‘61.» . 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Average Average Residuals Average Residuals —_ Residuals —_——_— 5.1 amuvonnonoomv9 ounce-«noun c n ~r nuwcounnoonOOhcocowmoOnonhh anhOOMNGIflht#HthOOmomehc oo—«owoomoo—mcoooo«Conundrum—cue ammncnusonmhcsanachoommoh C.....:...C............O0.0. I site-I me ed a- v-Ic-I FDOOOOOOFFFhmOFOOhNGOOO¢Qs- NOOFFh—a—IOFO-‘OO‘OM‘OM‘IOM‘M‘M‘OOu‘sm OhNnflFP-OOMOs-nootent 0M0 con—79mm“; HOONNHMHNNNNNNQMNMNNM—CNMN OOOOOOOOOOOOOOOOOOOOOOOOOOO eseeeeeeeeseeeeeeeseeeeeeee .02210 H . N O HONOGONOOMWFOa-«DMOOOOONNNF‘FI‘OOI‘ IIIFOOFGQtOI‘DNOO—IOONI‘OG‘HMInOOGFOO—t ONGOOU‘Q’NNOOefltdfiDG'OMONs-Ihh—OOOM‘NF—a OOOhNOv-INocooonhcuubhnhndu¢ocmo ODNorNONo—tcmoom0¢~c¢NNn¢~n~Nou OOOOOOOQQOOOOOOOQOOOO0.00...... IMINIIll-O—tl. IMTTII—‘T—t? 9.? In OOOOOOOOOGOOOOOOGOOOOOOOOOOOOOO m I I m I I I I I I .' CUflUlflIIVE fl'llflfl‘ RESIOUMIS l-SCOR! 0M nvtaane RESIDURIS Graph Graph #897 175 Z 9!: RESO.PERIOOI.lOO Z “PIER IRX.FQRKEY HODEL . ] W \ {M :se.PERIODI.100 z RFYER fax.nsantr HODEL .6 I. I. cum-C- Graph #B99 }_£RR.PERIOOI.100 2 arts! fax.nnaxer noosL l-SCDCE 0M CUMUlflIIV! MVERRO! RESIOUHIS g. rlnE TABLE :8-10' Positive/Negative NPV Pirms Period 1 9 Before-Tax Discount Rate Market Model Actual Exchange Negative RPV Pirme (17) Positive II‘PV Pirma (23) Standard Cumulative Standard Z score on Cuulative Cumulative Residuals Cumulative 2 score on Average Average Residuals Residualg_ Residuals Average Residuals Average Residuals Average Residuals Average Residuals 176 anathema—ooomnn~onn0h~oocnm ‘ n~~o~n~~~n~oo~ocmononOhooo0:22: ccoammone«moonstonno~~~onuoo~0m ~noo~onon¢~cno~~o~m~hc~honnnceN OuommhnmntncontfloDON—tthannOh ...0...........'............O... 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I I‘C MHOODNOl“ M"°mflfirn°~°0°fl~nfm ”TWIIIIIIIII unwed—on CUNUIRIIVE MVIRBOE RISIOURIS 179 Graph #B913 1 9V6 RESO.PERIOOI.LOO 2 BEFORE Iax.HQRKEV HODEL .I ..‘c‘ - I-SCORE OM “VIRROE RESIOUHIS Graph #3914 ‘21 f0 JV W ‘V [v .I, VINE _£F§.'ERIOOI.IOO 2 BEFORE TBX.RQRKET HOOEL —mas cult. 9h!" s VIBE l-SCORE OI CUflUlflIIVE “VERROC I!SIDURIS Graph #8915 £_Cfll-'ERIOOI.IOO Z BEFORE TRX.MORKET HODEL TIRE TABLE B912 180 Period 2 9 Market Model Residuals Standard Standard Day Average Average Cumulative Residuals Residuals Residuals 915 9.00248 9.36964 9.36964 914 .00888 1.12614 .42666 913 9.01528 92.23386 9.86306 912 .00469 .95669 9.38471 911 .00076 9.00678 9.38774 910 .00124 .20003 9.30608 9 9 .00531 .86060 .01919 9 8 9.00260 9.23285 9.06313 9 7 9.00200 9.67006 9.28648 9 6 9.00445 91.07142 9.62530 9 5 .00971 1.54261 9.16018 9 4 9.00241 9.09716 9.18823 9 3 9.00700 91.49776 9.60363 9 2 9.00130 9.30866 9.68613 9 1 .00299 .75854 9.49027 0 .00536 1.03126 9.23246 1 .00050 .24579 9.17285 2 9.00611 9.48811 9.28790 3 9.00693 91.03227 9.52472 4 9.00373 9.47697 9.63137 5 9.00254 9.77310 9.80008 6 9.00681 91.92731 91.21098 7 .00076 9.26941 91.26716 8 .00893 1.93832 9.87150 9 9.00142 9.50820 9.97314 10 9.00414 91.31015 91.23009 11 9.00597 9.89995 91.40328 12 .00564 1.02658 91.20927 13 9.01174 92.34748 91.64519 14 9.00234 .09436 91.62796 15 .00182 .61010 91.51838 CIIIIIJII IVE “VIII”! RESIMS 1131. Graph #B916 Z95CORE RVERRGE RESIOURLSJERIOD ZmORKET MODEL 1 :2- - ofll’ 195C008 0M IIVERIUE RESIMS fix Ling—J “.18 9., fuse g [8 Graph #8917 Graph #3918 run ave aesosmumo 2...“..9 HOOEL 225508: cun ave stsosmsnxoo 2.89am? HODEL . A A [1 g .1801 “V VV g ..... 3 an .m U 3 ‘52.. “3':- = .u .. , “ I. ""546 -I TIRE us 182 TABLE B913 Period 2 9 Market Model Day T91 Cumulative Firm Firm Standard Standard Residual Residual-T Residual Allegheny Airlines (U.S. Air) 9.04198 91.24650 91.96594 Allegheny Ludlum .01559 .91138 .00414 American Medicorp 9.06329 91.55796 9.42107 Athlone Industries, Inc. .00565 .39559 .30286 Bay Colony Property .04391 .85975 9.77742 Chase Manhattan MTG .00134 .03237 .83395 Chelsea Inds. Inc. .04331 1.21511 9.00878 Columbia Pictures Inc. 9.06085 91.01613 9.13482 Condec Corporation .00985 .39951 2.73208 Contin Investment Trust .01285 .36419 94.29589 Cooper Labs Inc. 9.01153 9.33009 91.66820 Dillingham Corporation 9.05045 91.74011 9.17187 Fairchild Industries, Inc. ~03012 1.27996 9.96434 Fedders Corporation .00585 9.16496 .12648 Fibreboard Corporation 9.03209 91.44363 .66929 General Host Inc. .00412 .13894 91.27793 General Instruments .02026 .59982 1.15609 Gulf Western Inds. Inc. 9.01159 9.70461 1.26895 Insilco Corporation .01688 .73025 .77910 Institutional Investors 9.02811 9.46821 9.71609 LVT Corporation 9.00057 9.02745 9.59526 McCulloch Oil 9.01727 9.41037 .00187 M G M 9.00028 9.00792 9.58885 Mohawk Data Sciences 9.02879 9.36314 1.55700 National Industries .08475 2.36677 .20065 Pan Am 9.08645 91.92956 9.81824 Pioneer Texas Corporation .01602 -30513 --34476 Ramada Inns Incorporated 9-04032 91-21045 91.16509 Roblin Industries, Inc, .12745 2.62789 1.29985 Rusco Industries, Inc. .06257 .99704 .09301 Sanders Assoc. Inc. 9.01236 9.21401 .86493 Texstar Corporation .01424 .34067 1.66988 UAL .01225 .77597 .75081 United Brands Co. .06297 2.44281 9.76847 Western Union Corporation 9.02778 '1-22305 .06545 Wickes Corporation 9.00608 9.25126 91.93453 Zapata Corporation .05268 2.15584 1.49080 Mean .00299 .75854 9.49027 183 TABLE B914 Period 2 9 Market Model Day To Cumulative Firm Firm Standard Standard Residual Residual-T Residual Allegheny Airlines (U.S. Air) 9.00431 9.12815 91.99798 Allegheny Ludlum .00436 .25503 .06790 American Medicorp .01487 .36588 9.32960 Athlone Industries, Inc. 9.00479 9.33611 .21883 Bay Colony Property 9.03843 9.75483 9.96613 Chase Manhattan MTG. 9.05490 91.31799 .51545 Chelsea Inds. Inc. .00942 .26451 .05734 Columbia Pictures Inc. 9.00495 9.08269 9.15550 Condec Corporation 9.00234 9.09495 2.70834 Contin Investment Trust .24255 6.86471 92.57971 Cooper Labs Inc. . .02684 .76865 91.47603 Dillingham Corporation 9.02767 9.96289 9.41260 Fairchild Industries, Inc. .00533 .22740 9.90749 Fedders Corporation 9.01066 9.30083 9.20169 Fibreboard Corporation .00826 .37288 .76251 General Host Inc. .01698 .57049 91.13531 General Instruments 9.01518 9.44836 1.04399 Gulf Western Inds. Inc. 9.00340 9.20696 1.21721 Insilco Corporation .00262 .11346 .80747 Institutional Investors 9.00174 9.02922 9.72340 LVT Corporation .01712 .82467 9.38909 McCulloch Oil 9.03247 9.75339 9.18647 M G M 9.03658 91.03135 9.84669 Mohawk Data Sciences 9.03113 9.39272 1.45881 National Industries 9.03010 9.84392 9.01032 Pan Am .00311 .06950 9.80087 Pioneer Texas Corporation 9.00501 9.09553 9.36864 Ramada Inns Incorporated .03399 1.00849 9.91296 Roblin Industries, Inc. .15541 3.19719 2.09915 Rusco Industries, Inc. 9.00459 9.07322 .07471 Sanders Assoc. Inc. 9.03335 9.57781 .72048 Texstar Corporation .00893 .21298 1.72313 UAL .00263 9.16758 .70891 United Brands Co. 9.02855 91.11820 91.04802 Western Union Corporation .00125 .05499 .07919 Wickes Corporation .02262 .93427 91.70096 Zapata Corporation 9.02230 9.09425 1.46720 Mean .00536 1.03126 9.23246 184 TABLE B915 Period 2 9 Market Model Day T+1 Cumulative Firm Firm Standard Standard Residual Residual-T Residual Allegheny Airlines (U.S. Air) 9.02165 9.64320 92.15398 Allegheny Ludlum 9.00464 9.27167 .00201 American Medicorp .00985 .24265 9.27075 Athlone Industries, Inc. -.00761 9.53274 .08962 Bay Colony Property .02940 .57582 9.82647 Chase Manhattan MTG .05843 1.40257 .85563 Chelsea Inds. Inc. .01581 .44414 .16506 Columbia Pictures Inc. 9.03229 9.53918 9.28627 Condec Corporation 9.00378 9.15337 2.67114 Contin Investment Trust .06369 1.80289 92.14244 Cooper Labs Inc. . 9.02770 9.79308 91.66839 Dillingham Corporation 9.00958 9.33285 9.49333 Fairchild Industries, Inc. .00612 .26071 9.84426 Fedders Corporation 9.05839 91.63697 9.59871 Fibreboard Corporation .00983 .44285 .86992 General Host Inc. .02220 .74424 9.95480 General Instruments .00309 .09145 1.06618 Gulf Western Inds. Inc. .01399 .84666 1.42256 Insilco Corporation .00124 .05366 .82049 Institutional Investors 9.10572 91.76609 91.15174 LVT Corporation 9.01684 9.80819 9.58510 McCulloch Oil 9.00463 9.10975 9.21309 M G M p .04009 1.13197 9.57214 Mohawk Data Sciences 9.00164 9.02076 1.45378 National Industries .04959 1.38005 .32438 Pan Am .00881 .19636 9.75324 Pioneer Texas Corporation .00796 .15194 9.33179 Ramada Inns Incorporated ‘ .06488 1.92312 9.44654 Roblin Industries, Inc. 9.08876 91.82961 1.65540 Rusco Industries, Inc. .00371 .05899 .08901 Sanders Assoc. Inc. .01685 .29167 .79122 Texstar Corporation .01833 9.43464 1.61771 UAL 9.02275 91.44927 .35741 United Brands Co. 9.01928 9.75711 91.23165 Western Union Corporation ~01183 -52158 .20570 Wickes Corporation .01824 .74869 91.51938 Zapata Corporation .00651 .26658 1.53190 .Mean .00050 .24579 9.17785 TABLE 08916 Positive/Negative NPV Firms Period 2 9 After-Tax Discount Rate Market Model Actual Exchange Negative NPV Firms (11) Positive m Pirms (25) Standard Cumulative Residuals Cumulative z score on Average Residuals Standard Cumulative Residuals Cumulative score on Average Residuals 2 Average Average Residuals Residuals Average Residuals —————————————— Average Residuals E1 185 ~NODDO~NNNODOOMONNMNO~O-NM ~00nnmhonmnno~~cmoOO¢eng~ozgzzg onenwonoonmocnowncnuouochooonno :gzggzgggzgoougnn~~ooo~ooochnoc ~09? 00 t . . .‘. 0 . 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RESIDUIIIS CUIIIIIII IVE IIVIIIIIOC RESIMS a.” m —m cm om "in - I II ”HE Graph #B-ZO Graph #B—Zl cam-enroozmcrum. arm mummy nooer §£“"'E“°°z'“"““‘- “"5" '“""‘“"ET "”5“ 0’ mass 3 L.“ 3 "c‘ sum g .m 5 A 2 w YJY ‘ g .1. 3 «a ..ame 5 3 I.“ “am m m r" F 2:. ~01!- -m -I 3:: #1:. MI! I u I. II . 0. Tm: 7"! TABLE '3-17 Positive/Negative NPV Fir-s Period 2 - After-Tax Discount Rate Market Model 1001 Exchange Ne ative IPV Piras(ll) Positive NPV Iirns(25) Standard Cuaulative Residuals Cuaulative ICOI’G on 2 Standard Cu-ulative Residuals —— Cu-ulative Average Z score on Average Average Residuals Residuals Average Residuals Residuals ——-———- Average Residuals Average Residuals _# ——-—a_ 187 uu~nnoc~000~~n009v~00 uhOhtuhthnONMfl0hcno—mwomenhhwoc 00n—o00000000—00000—I0000000000—000 0000000000000000000000000000000 OOOQOOOOOOOOOOOO000.00.00.00... 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R¢SIOUflt5 190 Graph #B-ZS 2 Av: RESO.PERIODZ.RCYUAL BEFORE rar.snnn5r nous z.:-- I l-SIORE 0M “VIRGO! RESIDURIS «H m -!UI -uumu- .. -m -| Il 4 . I I ma Graph #B—26 Graph #B-27 caa.P£Rlooz.ncTuaL serous Immune? most 1! guwsuoozmcrum across Humane? noon U! E .nmm g L“. 3 3 JUN g -~ 5 8 1 : '-.Iu I 3 .M . é \ ....... g ..... 8 3 Q I name use a—gu. -IUI _¢.a -m _ not. .| _ -8" I s -I ”BE - "HE TABLE '3-19 Positive/Negative NPV Firms Period 2 - Before-Tax Discount Rate Market Model 1001 Exchange Negative NPV Pirms (16) Standard Cumulative Residuals Cumulative score on 2 Average Residuals Average Residuals Average Residuals 1191 has. a.) oak-anew o—unmomo ~ra In DNO—Im—h—«r monou¢¢n~~3¢0hau~on0—av000~00~o 3 ON no cunnNnNo-nhnmm QJNMO—IONNEW on ohnnovo.uoonu¢¢~~oo«-oN0~O~m~~r~c~m~ manna-nmama-noes";uoamoocoosocoo—ome ..QOOOOOOCOOO0.0000000000000000 ' IIIIIIIIIIIITM—I O . . o=rh0nhOONO-nmwh~nn-h0no~emu a. «momma!» Ow «\OanaoNNMOOmmcoI'30gttg c 00 ac OmnO «whomnnmoe v! 00 o—ho o «Dc-oh— O-IOH-e—INHNNMMNM—IO amaa—I-NN—IHNHF‘IM" 000 00 0000 00 00000000000 :00 300000 aeeoeebeeeeeOeee‘eeeeaeeeeeeeeee I I. 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IIIIIIIIIIIIIII IIII IIIIIII OOMOONNN°€n5Ifl°M~GMNMMNOFM000CO OI\MMOONG\M\MN°O°°OU\QNGMMO 3005M ”0500¢n0~N0h0m~0000¢no~rn0h Oh 0n Ont mum-v: o~ocon~~9~~runt~nnwuwnnw MMQ¢~OMOOFO°M~NOONNOO¢OMOdOthV-r eeeeeeeeeeeasaaeeeeaeeesseeae'ee WI 2" 7I~I IIWINI'II “'4'! I I wt GOO-Ink £0n0~0m~~nc0~00l~mt~ono om» MonmahOOMm-rnonhnoowes-rucv-«nhoml Oanmonmnonh—aummowa‘oNmmcchn—«uo 00—00000000-m000000000000-40000—n00 0000000000000000000000000000000 .00....OOOOOOOOOOOOOOOOOOOOO... nemundoohonenunouwnenonmoo-nca WIIIIIIIII "m CUMUIRIIVI “Vllflfli RESIOURIS 192 Graph #B-28 Z QVE RE$0.PERIOOZ.IOO 2 BEFORE YRX.HORKE7 HODEL 83:: i K g m i ‘“ J/K I A g V \U V 4....” “I"! ' u 4- flat I n Graph #B-29 ° Graph #3—30 _;_s_ag.nsuooz.loo 1: serous museums? noon idc‘nkmeuoozaoo 2 across raxmanxsr aooa .auso g ham 9 V ' é \ noun 8 a“ 5 3 m m I." —m -I I -I VIRE VINE 193 Table #B-ZO Period 3 - Market Model Residuals Standard Standard Average Average Cumulative Day Residuals Residuals Residuals -15 .00335 1.14438 1.14438 -.01241 -1.34840 .19091 .00569 .18169 .29581 .00642 .42964 .51063 -.00588 -1.09S31 .02079 -10 -.00058 -.27917 -.09317 .00200 .13535 -.04201 -.00295 .00525 -.04015 -.00285 -.36951 -.16333 —.00505 -.72286 —.39191 —5 -.OO409 -l.10537 -.72519 -.00034 -.34200 -.82392 -.00141 -.68385 -l.01359 -.00334 -.l7311 -l.05986 -.00211 -.01425 -1.06354 0 .00194 -.33186 -1.l4650 .00526 1.77831 —.71520 -.01163 -1.98241 -1.18246 -.00255 -.01205 -l.18522 .00241 .49899 -1.07364 5 .00029 -.01212 -1.07629 .01695 2.00732 -.64833 .00203 g .87483 -.46591 -.00086 -.19707 -.50614 .01163 1.56068 -.19400 10 .00584 .86775 -.02382 .00226 .00692 -.02249 -.4478 -l.15641 -.24103 .00528 .80925 -.O9075 .00245 .84193 .06296 15 .00075 .69399 .18760 (WIN IVE IIVERIIOE RESIDUIILS 194 Graph #B-31 PEEP}! OVER‘IGE RESIOURLSJERXOO LM'IRIIE' HOOEL 1 SCORE 0M IIV‘RIIK “SIMS I i 7 -I JIM mm -mm *4”!!! . '— II -I ' II mat ' Graph #B-32 Graph #B-33 u_:un av: RESDSJERIOD amour? HODEL I {icon cun av: Itsosmtntoo Lanna? HOOEL 0 .m 3 me 3 3 .QIM g .00 E e / § "CI“ 8 h“ '5 ¥ Mm ~ “a m m ..n' --III at.“ 'I ..- *8“ -s 3 VIII! NH! 1195 Table #8-21 Period 3 - Market Model Day T—l . Cumulative Standard Standard .1112 32.192 W _Rc_ud_ua_;. Allegheny Airlines Inc. -.00796 -.25052 .26872 Allegheny Ludlum Industries, Inc. -.01677 -.9875 -2.3859 American Medicorp. -.01247 -.30789 -2.06411 Athlone Industries, Inc. .00901 .63002 .65865 Say Colony Property -.03371 -.65351 -.59864 Chase Manhattan Mortgage & Realty Co. .00237 .05663 -l.03232 Chelsea Industries, Inc. .01228 .34818 1.65917 Columbia Pictures Industries, Inc. .00570 .08660 -1.84115 Condec Corporation .01651 .6605 -2-82438 Cooper Labs . Incorporated -.01813 -.54862 -1.45852 Dillinshflfl'COfvbration -.01848 -.59762 -2.98308 Fairchild Industries, Inc. .00626 .00993 1.66523 Fedders Corporation ' .09741 2.63438 -.57997 Fibreboard Corporation -.00994 -.44711 1.66717 General Instruments -.Ol756 -.54027 4.11605 Grumman Corporation .00473 .1543? -.93511 Gulf G western Industries, Inc. .03865 2.31299 .08465 Insilco Corporation ’ -.Ol663 -.7l402 .03237 Institutional Investors '.00902 -.15031 -.04085 LTV Corporation .01696 .83163 -.29666 McCulloch Oil Corporation .03626 .84996 .47881 MGM .01227 .34398 -.13214 Mohawk Data Sciences Corporation -.02518 -.33017 -l.32646 National Industries -.04093 -1.12411 1.06713 Pan Am -.03214 -.84904 .12702 Pioneer Texas Corporation .02082 .40278 .06062 Ramada Inns -.00873 -.27069 1.84038 Rapid American Corporation -.OO624 -.15095 -.90913 Roblin Industries Inc. -.09641 -1.85723 -.l4201 Rusco Industries Inc. -.OO406 -.06785 .93486 Sanders Assoc Inc. .01063 .18324 1.62329 Texstar Corporation -.03099 -.72096 -l.42742 UAL .00282 .17542 1.15664 United Brands Co. -.O39l4 -l.54079 -.15775 Western Union Co. .01794 .77978 -4.32693 white Motor Corporation .06447 1.70124 -1.25863 Wickes Corporation -.00289 -.12008 1.00575 Zapata Corporation -.OO787 -.32005 1.70642 Mean -.00211 -.01425 -1.06354 196 Table 88-22 Period 3 - Market Model Day To Firm Residuals Allegheny Airlines Inc. .01178 Allegheny Ludlum Industries, Inc. .03128 American Medicorp. .04136 Athlone Industries, Inc. -.02410 Bay Colony Property .05317 Chase Manhattan Mortgage 6 Realty Co. -.00062 Chelsea Industries, Inc. .02157 Columbia Pictures Industries, Inc. -.02386 Condec Corporation .02134 Cooper Labs, Incorporated .00776 Dillingham Corporation -.08512 Fairchild Industries, Inc. .00021 Fedders Corporation .00477 Fibreboard Corporation -.06338 General Instruments .01376 Grumman Corporation -.03838 Gulf & Western Industries, Inc. -.01966 Insilco Corporation . .00089 Institutional Investors .07427 LTV Corporation -.00363 McCulloch Oil Corporation -.05992 MGM .08655 Mohawk Data Sciences Corporation -.00369 National Industries .03032 Pan Am .00768 Pioneer Texas Corporation -.04793 Ramada Inns .00147 Rapid American Corporation .00388 Roblin Industries Inc. .12139 Rusco Industries Inc. -.00142 Sanders Assoc Inc. -.01293 Texstar Corporation -.02093 UAL -.01334 United Brands Co. .00499 western Union Co. -.01982 White Motor Corporation -.00562 Wickes Corporation -.03899 Zapata Corporation .02821 Mean .00194 Standard 593122. .37014 1.8520 1.00831 -1.68499 1.02923 -.01474 .61241 -.40493 .85276 .23485 -2.75573 .00993 ‘ -.03119 -2.83551 .42367 -1.2534 -1.17557 .03879 1.23841 -.l7826 -1.40665 2.44379 -.04856 .83386 .20279 -.92792 .04556 .09385 2.32426 -.02377 -.22299 -.48485 -.83130 .19812 -.86221 -.14902 -1.62201 1.14586 -.33186 Cumulative Standard Residual .36126 -1.9229 -1.81203 .23740 -.34l33 -1.03232 1.81228 -1.94238 -2.61119 -1.39980 -3.67201 1.66522 -.12886 .95829 4.22197 -1.24846 -.20924 .04207 .26875 -.34123 .12715 .47880 -1.33860 1.27560 .47229 -.17135 1.84038 -.88567 .43905 .92892 1.56754 -1.54863 .94882 -.10802 -4.54248 -1.29588 .60024 1.99288 -1.14650 Firm Allegheny Airlines Inc. Allegheny Ludlum Industries, Inc. American Medicorp. Athlone Industries, Inc. Bay Colony Property Chase Manhattan Mortgage 6 Chelsea Industries, Inc. Columbia Pictures Industries, Inc. Condec Corporation Cooper Labs, Incorporated Dillingham Corporation Fairchild Industries, Inc. Fedders Corporation Fibreboard Corporation General Instruments Grumman Corporation Gulf & Western Industries, Insilco Corporation Institutional Investors LTV Corporation McCulloch Oil Corporation MGM Mohawk Data Sciences Corporation National Industries Pan Am Pioneer Texas Corporation Ramada Inns Rapid American Corporation Roblin Industries Inc. Rusco Industries Inc. Sanders Assoc Inc. Texstar Corporation UAL United Brands Co. Western Union Co. White Motor Corporation Wickes Corporation Zapata Corporation Mean 197 Table lB-23 Period 3 - Market Model Day I + l Eli-$3.1. .01286 .00207 .00644 .03059 .00063 .00351 .00507 .04646 .03281 .00584 .08817 .02213 " .04556 .00201 .00803 .00499 Realty Co. -Inc. ' .01486' .05389 .10194 ..00198 .06438 .02466 .00789 .07054 .04625 .02896 .06721 .00011 .06889 .06638 .00834 .09400 .00481 .00401 .05078 .06645 .01878 .00364 .00526 Residual .40396 .12294 .15714 2.13882 .01227 -.08364 .14345 -.78850 -1.31302 -.l7657 2.80311 -1.03972 -1.23249 .0905 .24730 .16195 .88904 2.32816 -1.68401 .09696 -1.49895 .69559 -.10327 -1.93805 1.21455 -.5604 2.08622 .00275 -1.32609 1.11055 .14399 2.20478 .29977 .15770 2.20576 1.74458 .78107 .14785 1.77831 Cumulative Standard Residual .45923 -1.89308 -1.77392 .75614 -.33835 -1.05261 1.84707 -2.13362 -2.92964 -1.35698 -2.99215 1.41306 -.91111 .98024 4.28194 -1.20918 .00638 .60673 -.13968 -.31771 -.23640 .64751 -1.36365 .80555 .47743 -.30727 2.34636 -.88500 .11742 1.19827 1.60247 -1.01389 1.02152 -.06977 -4.00750 -.87276 .78968 2.02874 -.71520 TABLE '3-24 0 U .2 Eu «5 ho a ,0 «win Ea... 2:33 0 23.71015 .H0 03%” gang; \‘ "’ . u ’I ‘ firs « 83 "u 0 a Negative NPV Pirma (ll) Posivive NPV Firms (27) Standard Cumulative Residuals Z score on Standard Cumulative Residuals Cumulative score on Average Residuals 2 .Cumulative Average Average Residuals Residuals Average Average Average Residuals Residuals Residuals —_——-—————*———m——_—— D_oz 198 MM NOODOMIOOJOtr‘IcOuNMQ ah I- n MID "WON-000'? 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Average Average Residuals 200 0¢~n06n~n~0h0n~oo~ezhuoceda—MNA FuhflflON~O~nhh9¢O~~0d0Hooo¢m000¢ c00cnabNN—cookoOnhmnhnmoehhoo~~ 0€N0fln0OdFMHOMNNFNMHNn0éfmmDNDO nmwco¢00mmon0Nhuoh00moconthoak O...00....000,000.00000000000000 IIIIIIIIIIIHdMHNNNNMNNMNNNNNNNN II.IIIIIIII'II.IIIIIIII ooman~n0~¢o~n~onoononhconncumwc t«tum0nmoncm0NhehnOnmoNNMONNOAF numoekhho QhNONOMOuw-Ie-IO Immno cameo 0000duHHNOHMNd¢¢hOFONOhhn¢canon ooaoooocooooooaooo0000000303000 00.0.00...00.000.00.000000000. 0 II IIIIIIIIIIJIIIIIIIIIIIIIIIII fiMhO*OMhUWOONI\MQOfN0—fl M 0—r~n~—~t Obnonhornm-‘N—Iuanno 4:20 0:: 9"‘00GNM0BIAOIDOOO‘0ONOHNnMNOawe-Im aINoOIvreNo—I—IONMaaIc'O‘oJanvcreqooqmg FONOO‘DOOCIQOQNK‘OOOIIIQQQFguhhn'aa‘n OOsseeseeeespeeeeesaeeeossaa... II II I .d7Tq.?~? 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Average m Average Residuals 922 NODI‘OCNONO OhOI‘OFOFNOO OOFOOOOO‘M s-IONO' 000M“ 0ND¢N~IOMOIIIC ”BOND“ sunO O'OhDDHOFOOFO‘ONMMMh-C MOMONOMF (“None-Inn“ Inc 001000 0 Nc-IhhMO I-IQ thinl‘OQM mflO000N—Ivt030 ONOBOOOO cans-mm: C 0 .0.0...,00000000.0.0.00000009000 IIIIIIIIIIITIIIII. ‘ BONMNOv-IhO-IfiO O ONFONOCOBI~0 OMOOO ODOMNI‘Mh—s—s—NO OM000NFC IIII'VIMOQ M0000 ¢0N~¢0000000—OOHO000nmwnh000000 0n0u-I000000HNNNNMMNMMMH—I—I0NNNNNN 0000000000000000000000000000000 onoonnnnnnoonnocoopeooonnncoouu 000 thflOOONOI‘mO ”NMHOD f 0" OWN oncnoonn0~o~nnohuunouthOOOOOOO oouhonnonnhnhncobnonhwwcunOucuh named—OnoNMONOGOnMOt000~NOOOO~h 00.00.00.000...0.00.00.0'0000000 7“ 7| II ?II IINTT N INnII I bOfi0hO0OfiDnflflOOQtomcffBNhOOhNuN 00¢hhh~00000fih¢~000IMMNONBOFOOD oasco~00~~oc~~cNu0000ownuhOBO0N 0—n0000000000000~0000~00Nu00000 0000000000000000000000000000000 000.00.00.00...00.00.000.000... nonsuOOOboncnuucuwncnohopo-non T77777IIIIIIIIP ‘ «nun—— 201 Graph #B-37 l 9'5 RESDJEIIODLQCVUQL BEFORE VBLH‘IRKEY r"(JOEL zat- , .4701 I I ..“fi l-SCNE OII “18880! RESIUUIIIS 1.19—"" f" -8“ -2". -8“, NRC Graph #B-38 canmutooamcrum. BEFORE Humane? noon ...... [H I . .mfi CW!" IVE IIVEIIIG! RISIDIIIILS F” -1!” -m up” s VINE l-SCOC! M CmflIlVE IIVEIIIOE RESIOUIIIS Graph #B-39 Z CEIJERIOOLGCT’URL SEFORE 'fll-FGRKET HOOEL K M 4."! Y s It!!! CRII (“‘2 (“l3 lilo 202 Graph #B-40 Z-SCORE “VEREGE RESIOURL5.HGRKEY HOOEL 6.|- _ (WIRES) l-I’. IRVI£S2 IRVRESI :T“T>~ 1-- (180 2? -l. ' nu Graph #3-41 Graph #3—42 cun ova ntsos.nonxtr HOOEL I z-scone cun ave aesos.nsentf HOUEL 3.5;‘ I I mass :3 ”to .Ofllfl //\J// g; I.flfl .men A A A n E .m 1 VV 2 “Olmr C, 5 In: IN“ W? -m m -m , 'fi-flfil dblflnl -m -m an“, -m "“1“ s a _‘...|. ’ " 203 TABLE B-26 Period 1 Spearman Rank Order Correlations Market Model Residuals After-tax Before-tax Discount Rate Discount Rate Spearman Probability Spearman Probability 100% Exchange t - 1 .0820 .308 .3846 .008 t 0 -.2026 .105 -.O705 .333 t + l -.l462 .185 .0983 .274 Average -.2197 .087 .0398 .404 Actual Exchange t — 1 .0274 .434 .4936 .001 t 0 -.2002 .108 -.O989 .272 Average -.2747 .073 .0336 .419 TABLE B-27 Period 2 Spearman Rank Order Correlations Market Model Residuals After—tax Before-tax Discount Rate Discount Rate Spearman Probability Spearman Probability 100% Exchange t - 1 -.2777 .051 .0100 .477 t O .0806 .321 .1624 .172 t + 1 .0432 .402 .1320 .222 Average -.1104 .261 .1598 .176 Actual Exchange t - 1 -.2582 .065 .0782 .326 t 0 .0342 .422 .1851 .140 t + 1 .0471 .393 .0636 .357 Average -.0865 .308 .1640 .170 204 TABLE B-28 Period 3 Spearman Rank Order Correlations Market Model Residuals Actual Exchange Spearman Probability After-tax Discount Rate t - 1 -.l668 .159 t 0 -.1721 .151 t + 1 .1616 .167 Average -.1049 .266 Before-tax Discount Rate t - 1 -.1679 .157 t 0 .0758 .326 t + 1 .1036 .268 Average .0848 .307 TABLE B-29 Spearman Rank Order Correlations Aggregated Correlations Actual Exchange Results Market Model Residuals Spearman Probability After-tax Discount Rate t - l -.3132 .034 t 0 -.2647 .063 t + 1 .0667 .352 Average -.2773 .054 Before-tax Discount Rate t - l .0751 .335 t 0 .1076 .270 t + 1 .1711 .163 Average .1280 .232 205 TABLE B-30 Spearman Rank Order Correlations Aggregated 16-Day CAR's Actual Exchange Results Market Model Residuals After-tax Before-tax Discount Rate Discount Rate Spearman Probability Spearman Probability Period 1 -.2867 .037 -.3523 .013 Period 2 .1014 .279 .0903 .301 Period 3 .1778 .143 .1505 .184 Average .0258 .442 -.1014 .282 TABLE B-31 Period 1 Pearson Product Moment Correlations Market Model Residuals After-tax Before-tax Discount Rate Discount Rate Pearson's Probability Pearson's Probability 100% Exchange t - 1 -.0295 .428 .1554 .169 t 0 -.0082 .480 .0416 .399 t + 1 -.3127 .022 -.1798 .133 Average -.1617 .159 -.0055 Actual Exchange t - 1 -.0684 .337 .2847 .037 t 0 —.1233 .224 .0013 .497 t + 1 -.3491 .014 -.1336 .206 206 TABLE B-32 Period 2 Pearson Product Moment Correlations Market Model Residuals After-tax Before-tax Discount Rate Discount Rate Pearson's Probability Pearson's Probability 100% Exchangg t - l -.0034 .492 .0232 .447 t O -.O621 .360 -.2087 .111 t + 1 .2906 .043 .2767 .051 Average .1638 .166 .3702 .012 Actual Exchange t O .1780 .149 -.0808 .320 t + 1 .1951 .127 .2170 .102 Average .1758 .149 .5048 .001 TABLE B-33 Period 3 Pearson Product Moment Correlations Actual Exchange Results Market Model Residuals Pearson's Probability After-tax Discount Rate t + 1 .1016 .272 Average .3285 .021 Before-tax Discount Rate t - l —.1502 .184 t O .1225 .232 t + 1 -.0210 .450 Average .0594 .360 207 TABLE B-34 Pearson Product Moment Correlations Aggregated Correlations Actual Exchange Results Market Model Residuals Pearson's Probability After-tax Discount Rate t - 1 —.0529 .381 t + 1 -.O620 .362 Average -.0886 .306 Before-tax Discount Rate t - 1 .0534 .380 t 0 .1030 .278 t + l .0935 .297 Average .1229 .241 TABLE B-35 Pearson Product Moment Correlations Aggregated 16 Day CARS Market Model Residuals After-tax Before-tax Discount Rate Discount Rate Pearson's Probability Pearson's Probability Period 1 -.2122 .094 —.2671 .048 Period 2 .0590 .366 -.0551 .375 Period 3 -.0121 .471 .0232 .445 Average -.0758 .333 -.1010 .280 APPENDIX C ZHRHKT ZRRHERN ZERO 208 GRAPH IC-l Z-SCORE RVE RESOS.PERIOD 1.HKT A MERN MODELS 41m: ' 3 0000" I 0800" -600v a m A a a a a a m A ‘Y I V v v Y v V v Y i T 1 f‘ v Vprv‘ V V7 - -1 08000 Ufiflw J, ‘i- ZERO ‘0' ZHRHKT ‘0'- ZRRHERN -3.ooc r . 4 can : '15 -5 5 15 CHRMKT CRRHERN ZERO CRRS.PERIOD 1.HKT A MERN MODELS 209 GRAPH IC-Z .05000 .04000+ . 03000" .OZOOOT .010001' A a a an- a A AA -. v v v v VT‘V’Y Viv v v v v v ‘11 v v VY‘V vvvvv --01000- -15 A f lS LEGEND -*- ZERO + CRRHKT + CRRHERN ZCRRMKT .ZCRMERN ZERO 210 GRAPH IC-3 Z-SCORE CRRSJ’ERIOD 1.MKT A MERN MODELS 3.800 TD 3.000" 2 .200" 1 MOO" .6000 - .200' LEE? -‘- ZERO + ZCRRMKT 4‘ ZCRMERN '1 -DDC 3 i r t r -15 . -5 S g 15 ZRRMKT ZRRMERN ZERO Z-SCORE RVE 211 GRAPHIC-4 RESDS.PERIOD 2.MKT A MERN MODELS 2.200 1-4000 {b -I.000v IL -108000 new -+-ZERO ‘0'ZRRHKT -*'ZRRHERN -2-SOO t t - -15 -5 5 15 CHRMKT CRRMERN ZERO 212 GRAPH IC-S CRRS.PERIOD 2.MKT A MERN MODELS .00720 .00000 yttcsAAj4iA¢¢fflcii4tftftt¢ff I ~o00720" --01440" “a021600 ‘002880" LEQENU -*— ZERO + CRRHKT ' “P CRRMERN «03600 t ¢ cf : t v. -15 -S 5 15 ZCRRMKT ZCRMERN ZERO 213 GRAPH I C-6 Z-SCORE CRRS.PERIOD 2.MKT A MERN MODELS .470 I! II .0300, A. A --410 ' " -.8500 . v -1-2904 v “107307 —2.17c : 4. : : t -15 -S 5 15 urns -+— ZERO -- zcnanx’r —-— zcanem. 214 GRAPE IC-7 Z-SCORE RVE RESDS.PERIOD 3.MKT A MERN MODELS ZRRMKT ZRRMERN ZERO 2.480 14640" H .80 ~4MO'° -107200 LEEM? -°- ZERO -a- ZRRMKT '0'- ZRRHEQN -2-580 f .. -15 -5 15 CRRMKT CRRMEHN ZERO 215 GRAPE IC-8 CRRS.F’ERIOD 3.MKT A MERN MODELS .01500 .00500’ ~005000 .01500" .02500" .03500“ LEM ..— ZERO + CRRMKT —-— cnanenu .04500 -15 Y-s 5 15 ZCRRMKT ZCRMERN ZERO 216 GRAPH lC-9 Z-SCORE CRRSJ’ERIOD 3.MKT A MERN MODELS 1.200 .660- 0120‘. A - . 420.. _ . 9604» ‘10500" AA LA 14;; A a LA; a m ‘ AJ‘J WTffW‘rvavvvvvvvva‘ 7V -2-O4C : -15 15 LEE!!! -- ZERO -— zcnanm -— zcanenu 21§7 Table ID-l MPV/Mkt Actual Exchange After-Tax Discount Rate Period 1 After-tax Average NPV Market Value Pira (millions S) (millions 3) Ratio (51 Allegheny Airlines Inc. 3.5833 32.2284 11.1186 Allegheny Ludlum Industries Inc. -6.1608 216.5985 -3.1780 American Medicorp. .8737 42.0464 2.0779 Athlone Industries, Inc. -.0047 47.8733 -.0099 Bay Colony Property -1.7762 6.8816 -25.8114 Chase Manhattan Mortgage 6 Realty Co. 6.5575 10.9935 59.649 Chelsea Industries, Inc. .4085 16.2506 2.5136 Columbia Pictures Industries, Inc. .9095 41.1628 2.21 Condec Corporation -1.3286 20.6042 -6.448 Cooper Labs, Incorporated .6947 62.9536 1.1 Dillingham Corporation 2.7429 90.3901 3.0346 Fairchild Industries, Inc. -3.1118 60.0232 . -5.1843 Fedders Corporation .4495 110.97 .405 Fibreboard Corporation 1.4404 50.0425 2.8784 General Boat Corporation 3.6054 14.0184 25.7189 General Instruments .4276 52.5862 ..8131 Grumman Corporation * 3.791 79.1268 4.791 Gulf 8 Western Industries, Inc. -16.0599 643.3942 -2.4961 Insilco Corporation 1.1707 76.6605 1.527 Institutional Investors -2.8443 16.0961 -l7.67 LTV Corporation 1.4991 135.0457 1.11 McCulloch Oil Corporation 1.6997 79.2602 2.1444 MGM .3639 65.8377 .5527 Mohawk Data Sciences Corporation 1.8592 19.8355 9.3732 Rational Industries -3.3089 25.2835 -13.0872 Pan Am 53.4283 291.8610 18.306 Pioneer Texas Corporation .01892 12.1836 .1553 Pittston Company 2.7179 685.7742 .396 Ramada Inns 1.9498 87.7485 2.222 Rapid American Corporation 8.9749 56.7451 15.816 Roblin Industries Inc. .8484 3.4468 24.613 Rusco Industries Inc. .3753 11.0617 3.393 Sanders Assoc Inc. 1.3496 12.9159 10.449 Texstar Corporation -.079 11.0635 -.714 UAL 5.8875 486.1462 1.211 United Brands Co. 6.4495 133.7683 4.821 Western Union Co. -2.6536 252.9024 -1.049 White Motor Corporation 1.3479 47.7156 2.8249 Wickes Corporation 1.7348 149.7414 1.1585 Zapata Corporation -1.0897 77.877 -l.399 218 Table ’Drz MPV/Mkt 1002 Exchange After-Tax Discount Rate Period 1 After-tax Average , NPV Market Value _ Firm guillions §2 gnillions §2 Ratio 522 Allegheny Airlines Inc. 6.4004 32.2284 19.8596 Allegheny Ludlum Industries, Inc. —7.1619 216.5985 -3.6944 American Medicorp. 2.9 42.0464 6.897 Athlone Industries, Inc. -.0176 47.8733 -.0367 Bay Colony Property —2.5299 6.8816 ~36.7647 Chase Manhattan Mortgage & Realty Co. 18.3446 10.9935 166.868 Chelsea Industries, Inc. 1.2205 16.2506 7.51 Columbia Pictures Industries, Inc. 1.4882 41.1628 3.615 Condec Corporation -1.7653 20.6042 -8.568 Cooper Labs, Incorporated 1.2235 62.9536 1.9435 Dillingham Corporation 4.7727 90.3901 5.28 Fairchild Industries, Inc. -4.3499 60.0232 -7.2471 Fedders Corporation -' 2.6777 110.970 , 2.413 Fibreboard Corporation 1.8574 50.0425 3.7116 General Host Corporation 4.9645 14.0184 35.4145 General Instruments .6722 52.5862 1.2782 Grin-an Corporation . _ 7.4748 79.1268 9.447 Gulf & Western Industries, Inc.. -27.6204 643.3942 -4.2929 Insilco Corporation 1.5609 76.6605 2.036 Institutional Investors -3.8963 16.0961 -24.407 LTV Corporation 4.2113 135.0457 3.118 McCulloch Oil Corporation 2.2571 79.2602 2.8478 MGM 1.0691 65.8377 1.6239 Mohawk Data Sciences Corporation 2.3935 19.8355 12.067 Rational Industries -4.4702 25.2835 -17.6804 Pan Am 71.591 291.8610 24.529 Pioneer Texas Corporation .1294 12.1836 1.0625 Pittston Canpany 4.1761 685.7742 .609 Ramada Inna 2.3625 87.7485 2.6924 Rapid American Corporation 17.8743 56.7451 31.499 Roblin Industries Inc. .8543 3.4468 24.787 Rusco Industries Inc. .5736 11.0617 5.185 Sanders Assoc Inc. 2.4543 12.9159 19.002 Texstar Corporation -.5524 11.0635 -4.9927 UAL 6.9308 486.1462 1.4257 United Brands Co. 3.7426 133.7683 2.798 Western Union Co. -3.433 252.9024 -1.357 White Motor Corporation 1.3137 47.7156 2.3639 Wickes Corporation 2.45 149.7414 1.636 Zapata Corporation -l.7878 77.877 -2.296 219 Table 90-3 NPV/Mkt Actual Exchange Before-Tax Discount Rate Period 1 Before-tax Average NPV Market Value Firm (millions S) imillions 5) Ratio (Z) Allegheny Airlines Inc. 4.0192 32.2284 12.4710 Allegheny Ludlum Industries, Inc. 4.085 216.5985 1.8860 American Medicorp. .3725 42.0464 .8859 Athlone Industries, Inc. .8777 47.8733 1.8334 Bay Colony Property 1.524 6.8876 22.1460 Chase Manhattan Mortgage 6 Realty Co. 6.6059 10.9935 60.0891 Chelsea Industries, Inc. .0806 16.2506 4.9598 Columbia Pictures Industries, Inc. -1.5345 41.1628 -3.7279 Condec Corporation -1.0047 20.6042 -4.8762 Cooper Labs, Incorporated .0128 62.9536 .0203 Dillingham Corporation 1.08 90.3901 1.1948 Fairchild Industries, Inc. -1.7485 60.0232 -2.913 Fedders Corporation -.769 110.970 -.6930 Fibreboard Corporation 1.0085 50.0425 2.0153 General Host Corporation .9707 14.0184 6.9245 General Instruments -.6998 52.5862 -1.3308 Grumman Corporation 2.318 79.1268 2.9295 Gulf & Western Industries, Inc. —6.0369 643.3942 -.9333 Insilco Corporation .3218 76.6605 .4198 Institutional Investors -.1221 16.0961 -.7586 LTV Corporation 5.9964 135.0457 4.4403 McCulloch Oil Corporation .0941 79.2602 .1187 MGM -.1634 65.8377 -.2482 Mohawk Data Sciences Corporation -.8569 19.855 -4.3158 Rational Injustries -.3862 25.2835 1.5275 Pan Am 40.115 291.861 13.7445 Pioneer Texas Corporation .0755 12.1836 .6197 Pittston Company 1.0157 685.7742 .1481 Ramada Inns -.585 87.7485 .6667 Rapid American Corporation 19.7714 56.7451 34.8425 Roblin Industries Inc. .3571 3.4468 10.3603 Rusco Industries, Inc. .1417 11.0617 1.2810 Sanders Assoc Inc. -1.2101 12.9159 -9.3691 Texstar Corporation -.0688 11.0635 -6.88 EAL -1.4585 486.1462 -.300 United Brands Co. o4.2367 133.7683 -3.1672 Eestern Union Co. -6.4378 252.9024 -2.5456 White Motor Corporation .9459 47.7156 1.9824 Kickes Corporation .6467 149.7414 .4319 Zapata Corporation 1.0420 77.877 1.338 220 Table ID-4 NPV/Mkt 1002 Exchange Before-Tax Discount Rate Period 1 Before-tax Average NPV Market Value Firm (millions $1 {millions §z Ratio gzg Allegheny Airlines Inc. 7.8333 32.2284 24.3056 Allegheny Ludlum Industries, Inc. 4.7488 216.5985 2.1924 American Medicorp. .9865 42.0464 2.3462 Athlone Industries, Inc. 2.9789 47.8733 6.2224 Bay Colony Property 2.1707 6.8816 31.5435 Chase Manhattan Mortgage 8 Realty Co. 20.1987 10.9935 183.7331 Chelsea Industries, Inc. .2412 16.2506 1.4842 Columbia Pictures Industries, Inc. -2.3202 41.1628 -5.6366 Condec Corporation -1.2525 20.6042 -6.0788 Cooper Labs, Incorporated -.0348 62.9536 -.0553 Dillingham Corporation 7 1.8793 90.3901 2.0791 Fairchild Industries, Inc. -2.4442 60.0232 -4.0721 Fedders Corporation -1.133l 110.970 -1.0211 Pibreboard Corporation 1.3108 50.0425 2.6194 General Boat Corporation 1.3323 14.0184 9.5039 General Instruments -.9039 52.5862 -l.7189 Grumman Corporation 4.5705 79.1268 5.7762 Gulf & Western Industries, Inc. -10.0854 643.3942 -1.5675 Insilco Corporation .4291 76.6605 .5597 Institutional Investors -.1672 16.0961 -1.0388 LTV Corporation 16.7274 135.0457 12.3865 McCulloch Oil Corporation .1258 79.2602 .1587 MGM -.480 65.8377 -.729l Mohawk Data Sciences Corporation -.8107 19.855 -4.0831 Rational Industries -2.4324 25.2835 9.6207 Pan Am 56.73 291.861 19.4373 Pioneer Texas Corporation 1.0354 12.1836 8.4983 Pittston Company 1.5451 685.7742 .2253 Ramada Inns .7085 87.7485 .8074 Rapid American Corporation 38.9147 56.7451 68.5781 Roblin Industries Inc. .3596 3.4468 10.4328 Rusco Industries Inc. .2164 11.0617 1.9563 Sanders Assoc Inc. -.3773 12.9159 -2.9212' Texstar Corporation -.4805 11.0635 -4.3431 UAL -1.748 486.1462 -.3596 United Brands Co. -2.688 133.7683 -2.0094 Western Union Co. -8.3322 252.9024 -3.2946 White Motor Corporation 1.0549 47.7156 2.2109 Wickes Corporation .9134 149.7414 .6100 Zapata Corporation 1.7091 77.877 2.1946 221 Table ID-S MPV/Mkt Actual Exchange After Tax Discount Rate Period 2 After-tax Average NPV Market Value Firm finillions $1 Aggillions S1 Ratio 522 Allegheny Airlines Inc. 3.5833 32.0778 11.1718 Allegheny Ludlum -6.1608 189.3105 -3.2543 American Medicorp .8737 47.9655 1.8215 Athlone Industries, Inc. -.OO47 48.9204 -.0096 Bay Colony Property -1.7762 10.1728 -17.4607 Chase Manhattan Mortgage 8 Realty Co. 6.5575 10.8713 60.3194 Chelsea Industries, Inc. .4085 20.0625 2.036 Columbia Pictures Industries, Inc. .9095 56.3458 1.61 Condec Corporation -1.3286 27.0515 -4.9113 Continental Investment Trust -8.7826 88.1856 -9.959 Cooper Labs, Incorporated .6947 57.68 . 1.204 Dillingham Corporation 2.7429 84.0246 3.264 Fairchild Industries, Inc. -3.1118 71.1472 -4.3737 Fedders Corporation .4495 137.0479 .3280 Fibreboard Corporation 1.4404 53.9784 2.6685 General Boat Corporation .3.6054 10.1421 35.549 General Instruments .4276 69.9952 .6109 Gulf 8 Western Industries, Inc. -16.0599 663.7245 -2.4l97 Insilco Corporation 1.1707 76.1634 1.5371 Institutional Investors -2.8443 9.5665 -29.732 LTV Corporation 1.4991 130.0564 1.1527 McCulloch Oil Corporation 1.6997 93.7843 1.8123 16M .3639 76.934 .473 Mohawk Data Sciences Corporation 1.8592 43.3865 4.285 Rational Industries -3.3089 26.4803 -12.4957 Pan Am 53.4283 247.0045 21.63 Pioneer Texas Corporation .0189 12.0692 .1568 Ramada Inns 1.9498 88.3753 2.2062 Roblin Industries Inc. .8484 2.5379 33.428 Rusco Industries Inc. .3753 8.1119 4.627 Sanders Assoc Inc. 1.3496 20.3454 6.634 Texstar Corporation -.079 9.7991 -.8062 UAL 5.8875 447.8138 1.3147 United Brands Co. 6.4495 109.4213 5.894 Western Union Co. -2.6536 318.7575 -.8325. Wickes Corporation 1.7348 118.4132 1.465 Zapata Corporation -1.0897 80.246 -1.358 1222 Table ID—6 RPV/Mkt 1002 Exchange After Tax Discount Rate Period 2 After-tax Average NPV Market Value Firm Smillions $2 smillions §2 Ratio 522 Allegheny Airlines Inc. 6.4004 32.0778 19.9529 Allegheny Ludlum -7.16l9 189.3105 -3.7832 American Medicorp 2.9 47.9655 6.046 Athlone Industries, Inc. -.0176 48.9204 -.O360 Bay Colony Property -2.53 10.1728 -24.87 Chase Manhattan Mortgage & Realty Co. 18.3446 10.8713 168.743 Chelsea Industries, Inc. 1.2205 20.0625 6.0837 Columbia Pictures Industries, Inc. 1.4882 56.3458 2.63 Condec Corporation -1.7653 27.0515 -6.526 Continental Investment Trust -9.3 88.1856 -10.546 Cooper Labs, Incorporated 1.2235 57.68 2.121 Dillingham Corporation 4.7727 84.0246 ' 5.68 Fairchild Industries, Inc. '-4.3499 71.1472 -6.1140 Pedders Corporation 2.6777 137.0479 1.9539 Fibreboard Corporation 1.8574 53.9784 3.441 General Host Corporation 4.9645 10.1421 48.95 General Instruments .6722 69.9952 .9603 Gulf & Western Industries, Inc. -27.6204 663.7245 -4.1614 Insilco Corporation 1.5609 76.1634 2.0494 Institutional Investors -3.8963 9.5665 -40.728 LTV Corporation 4.2113 130.0564 3.2381 McCulloch Oil Corporation 2.2571 93.7843 2.4067 MGM 1.0691 76.934 1.3897 Mohawk Data Sciences Corporation 2.3935 43.3865 5.5166 Rational Industries -4.4702 26.4803 -16.8814 Pan Am. 71.591 _247.0045 28.984 Pioneer Texas Corporation ‘ .1294 12.0692 1.0726 Ramada Inns 2.3625 88.3753 2.6733 Roblin Industries Inc. .8543 2.5379 33.664 Rusco Industries Inc. .5736 8.1119 7.071 Sanders Assoc Inc. 2.4543 20.3454 12.063 Texstar Corporation -.5524 9.7991 -5.6369 UAL 6.9308 447.8138 1.5477 United Brands Co. 3.7426 109.4213 3.42 Western Union Co. -3.433 318.7575 -1.077 Wickes Corporation 2.45 118.4132 2.069 Zapata Corporation -1.7878 80.246 -2.228 2123 Table lD-7 NPV/Mkt - Actual Exchange Before Tax Discount Rate Period 2 Before-tax Average NPV Market Value Pirm jgillions S) juillions §2 Ratio 522 Allegheny Airlines Inc. 4.0192 32.0778 12.5295 Allegheny Ludlum 4.085 189.3105 2.1578 American Medicorp .3725 47.9655 .7766 Athlone Industries, Inc. .8777 48.9204 1.7941 Bay Colony Property 1.524 10.1728 14.9811 Chase Manhattan Mortgage & Realty Co. 6.6059 10.8713 60.7646 Chelsea Industries, Inc. 0806 20.0625 .4017 Columbia Pictures Industries, Inc. -1.5345 56.3458 -2.7234 Condec Corporation -1.0047 27.0515 -3.7l4O Continental Investment Trust -7.6252 88.1856 -8.6467 Cooper Labs, Incorporated .0128 57.68 .0222 Dillingham Corporation 1.08 84.0246 1.2853 Fairchild Industries, Inc. -1.7485 71.1472 ' -2.4576 Pedders Corporation .769 137.0479 .5611 Fibreboard Corporation 1.0085 53.9784 1.8683 General Boat Corporation .9707 10.1421 -9.5710 General Instruments , -.6998 69.9952 -.9998 Gulf 6 Western Industries, Inc. -6.0369 663.7245 ,,9095 Insilco Corporation .3218 76.1634 .4225 Institutional Investors -.l221 9.5665 1.2763 LTV Corporation 5.9964 130.0564 -.46106 McCulloch Oil Corporation .0941 93.7843 .1003 MGM -.1634 76.934 -.2124 Mohawk Data Sciences Corporation -.8569 43.3865 '1-9750 Rational Industries -.3862 26.4803 1.4584 Pan Am 40.115 247.0045 16.2406 Pioneer Texas Corporation .0755 12.0692 .6255 Ramada Inns -.585 88.3753 .6619 Roblin Industries Inc. .3571 2.5379 14.0707 Rusco Industries Inc. .1417 8.1119 1.7468 Sanders Assoc Inc. -1.2101 20.3454 -5.9478 Texstar Corporation -.0688 9.7991 -.7021 UAL -1.4585 447.8138 -.3257 United Brands Co. -4.2367 109.4213 -3.87l9 Western Union Co. -6.4378 318.7575 -2.0196 Wickes Corporation .6467 118.4132 .5461 Zapata Corporation 1.6420 80.246 1.2985 Firm Allegheny Airlines Inc. Allegheny Ludlum American Medicorp Athlone Industries, Inc. Bay Colony Property Chase Manhattan Mortgage & Realty Co. Chelsea Indus tries , Inc. Columbia Pictures Industries, Inc. Condec Corporation Continental Investment Trust Cooper Labs, Incorporated Dillingham Corporation Fairchild Industries, Inc. ladders Corporation Fibreboard Corporation General Boat Corporation General Instruments Gulf 3 Western Industries, Inc.' Insilco Corporation Institutional Investors LTV Corporation McCulloch Oil Corporation MGM Mohawk Data Sciences Corporation National Industries Pan Am Pioneer Texas Corporation Ramada Inns Roblin Industries Inc. Rusco Industries Inc. Sanders Assoc Inc. Texstar Corporation UAL United Brands Co. Western Union Co. Wickes Corporation Zapata Corporation 221I Table ID-S NPV/Mkt - 1002 Exchange Before Tax Discount Rate Period 2 Before-tax NPV Smillions 22 7.3333 4.7433 .9335 2.9739 2.1707 20.1937 .2412 -2.3202 -1.2525 -3.0744 -.0343 1.3793 -2.4442 -1.1331 1.3103 1.3323 _ -.9039 -10.0354 .4291 -.1372 13.7274 .1253 -.430 -.3107 -2.4324 53.73 1.0354 .7035 .3593 .2134 -.3773 -.4305 -1.743 -2.333 -3.3322 .9134 1.7091 Average Market Value {millions $2 32.0778 189.3105 47.9655 48.9204 10.1728 10.8713 20.0625 56.3458 27.0515 88.1856 57.68 84.0246 71.1472 137.0479 53.9784 10.1421 69.9952 663.7245 76.1634 9.5665 130.0564 93.7843 76.934 43.3865 26.4803 247.0045 12.0692 88.3753 2.5379 8.1119 20.3454 9.7991 447.8138 109.4213 318.7575 118.4132 80.246 Ratio 512 24.4197 2.5085 2.0567 6.0893 21.3383 185.7984 1.2022 -4.ll78 -4.6301 -9.1561 -.0603 2.2366 -3.4354 .8268 2.4284 13.1363 1.2914 91.5195 .5634 1.7478 12.8616 .1341 -.6239 -l.8685 -9.1857 22.9672 8.5789 .8017 14.1692 8.0717 -l.8545 -4.9035 -.3903 -2.4566 -2.6139 .7714 2.1298 Table NPV/Mkt - Actual Exchange After-tax Discount Rate Period 3 After-tax NPV Firm guillions $2 Allegheny Airlines Inc. 3.5833 Allegheny Ludlum Industries, Inc. -6.1608 American Medicorp. .8737 Athlone Industries, Inc. -.0047 Bay Colony Property -1.7762 Chase Manhattan Mortgage A Realty Co. 6.5575 Chelsea Industries, Inc. .4085 Columbia Pictures Industries, Inc. .9095 Condec Corporation -1.3286 Cooper Labs, Incorporated .6947 Dillingham Corporation 2.7429 Fairchild Industries, Inc. -3.1118 Fedders Corporation " ‘ .4495 Fibreboard Corporation 1.4404 General Host, Inc. 3.6054 General Instruments .4276 Grumman Corporation - - 3.7910 Gulf 8 Western Industries, Inc.= -l6.0599 Insilco Corporation 1.1707 Institutional Investors -2.8443 LTV Corporation 1.4991 McCulloch Oil Corporation 1.6997 MGM .3639 Mohawk Data Sciences Corporation 1.8592 Rational Industries -3.3089 Pan Am 53.4283 Pioneer Texas Corporation .0189 Ramada Inns 1.9498 Rapid American Corporation 8.9749 Roblin Industries Inc. .8484 Rusco Industries Inc. .3753 Sanders Assoc Inc. 1.3496 Texstar Corporation -.079 UAL 5.8875 United Brands Co. 6.4495 Western Union Co. -2.6536 White Motor Corporation 1.3479 Wickes Corporation 1.7348 Zapata Corporation -1.0897 225 ID-9 Average Market Value Smillions $2 29.8188 169.034 43.6738 50.1396 8.976 9.8941 20.7981 54.9962 22.8724 53.8896 72.5667 82.3871 91.2728 . 49.8818 10.3545 90.9938 70.4877 651.7655 72.1548 10.6295 131.3869 81.3351 75.3065 35.1224 27.1681 223.7819 13.5564 85.8682 44.7678 2.3522 8.2212 24.3459 8.1396 451.5097 97.1079 232.7272 76.0175 134.1854 84.6259 Ratio 52! 12.0170 -3.6447 2.0 -.0094 -19.7888 66.277 1.964 1.65 -5.8087 1.289 3.78 -3.777 .4924 2.8877 34.819 .4699 5.378 -2.4641 1.6225 -26.758 1.141 2.0897 .4832 5.2936 -12.1793 23.875 .1396 2.2707 20.048 36.067 4.565 5.544 - -.9706 1.304 6.642 -1.14 1.7732 1.293 -1.288 226 Table ID-IO MPV/Mkt - Actual Exchange Before-tax Discount Rate Period 3 Before-tax Average MPV Market Value Firm gmillions 8) 4_jmillions 8), Ratio (2) Allegheny Airlines Inc. 4.0192 29.8188 13.4787 Allegheny Ludlum Industries, Inc. 4.085 169.034 2.4167 American Medicorp. .3725 43.6738 .8529 Athlone Industries, Inc. .8777 50.1396 1.7505 Bay Colony Property 1.524 8.976 1.6978 Chase Manhattan Mortgage 8 Realty Co. 6.6059 9.8941 66.76605 Chelsea Industries, Inc. .0806 20.7981 .3875 Columbia Pictures Industries, Inc. -1.5345 54.9962 -2.7902 Condec Corporation -1.0047 22.8724 -4.3926 Cobper Labs, Incorporated .0128 53.8896 .0237 Dillingham Corporation 1.08 72.5667 1.4883 Pairchild Industries, Inc. -1.7485 82.3871 -2.1223 Pedders Corporation -.769 91.2728 -.8425 Fibreboard Corporation 1.0085 49.8818 2.0218 General Boat, Inc. .9707 10.3545 9.3746 General Instruments -.6998 90.9938 -.7691 Grumman Corporation 2.318 70.4877 3.2885 Gulf & Western Industries, Inc. -6.0369 651.7655 -.9262 Insilco Corporation .3218 72.1548 .4460 Institutional Investors -.1221 10.6295 -1.1487 LTV Corporation 5.9964 131.3869 4.5639 McCulloch Oil Corporation .0941 81.3351 .1157 MGM -.1634 75.3065 -.2l70 Mohawk Data Sciences Corporation -.8569 35.1224 -2.4397 Rational Industries .3862 27.1681 1.4215 Pan Am 40.115 223.7819 17.9259 Pioneer Texas Corporation 8 .0755 13.5564 .5569 Ramada Inna -.585 85.8682 -.6813 Rapid American Corporation 19.7714 44.7678 44.1643 Roblin Industries Inc. .3571 2.3522 15.1815 Rusco Industries Inc. .1417 8.2212 1.7236 Sanders Assoc Inc. -l.2101 24.3459 -4.9704 Texstar Corporation -.0688 8.1396 -.8452 UAL -1.4585 451.5097 -.3230 United Brands Co. -4.2367 97.1079 -4.3629 Western Union Co. -6.4378 232.7272 -2.7662 White Motor Corporation .9459 76.0175 1.2443 Wickes Corporation .6467 134.1854 .4819 Zapata Corporation 1.0420 84.6259 1.2313 BIBLIOGRAPHY Accounting Principles Board Opinion No. 6. 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