In-Substance Defeasance And Shareholders Wealth

In November, 1983, the Financial Accounting Standards Board issued Statement No. 76: Extinguishment of Debt. The Statement permitted corporations completing an in-substance defeasance to recognize an increase in earnings and earnings per share. High interest rates in 1984 and the Statement encouraged corporate managers to in-substance defeasance debt and show the associated increase in earnings per share. In our examination of 19 companies defeasing bonds during the period 1983-1985, we found no impact on stock price. Although the process led to an accounting profit for each company, investors interpreted the change in capital structure to be transitory and/or too small to require altering their investment portfolios