Journal of Applied Research in Accounting and Finance

Vol 1 (1) December 2006

Editorial

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Defaults and Returns in the High Yield Bond Market: The Year 2005 in Review and Market Outlook by Edward I. Altman and Brent Pasternack

Dr. Altman has earned an international reputation as an expert on corporate bankruptcy, high yield bonds, distressed debt and credit risk analysis. In this article, Altman and his team provide a comprehensive review of the 2005 high yield bond market. The article provides detailed long-term analysis of the US market, as well as trends in default, bankruptcy, recovery and returns for investors. Against this historical backdrop, the article offer some guidance on expected default rates and market performance in the burgeoning high-yield distressed bond market.

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Taxation as a Driver for Designing Hybrid Securities by Gordon Mackenzie

Changes in 2001 to the tax laws for Hybrid securities occurred at the same time as proposed accounting, regulatory and ratings agency changes for those types of securities. The tax law changes appear to have had their intended effect on the targeted Hybrid securities, Income Securities, but it also appears that the design of Hybrid securities following those changes owes more to the accounting, regulatory and other changes that were occurring that to the changes in the tax laws.

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Hybrid Financial Instruments, Cost of Capital and Regulatory Arbitrage - An Empirical Investigation by Tyrone M. Carlin, Nigel Finch and Guy Ford

Data recently published by the Reserve Bank of Australia clearly demonstrates that after a period in abeyance, hybrid financial instruments have again become popular tools for capital raising and management. This raises several questions of practical and theoretical significance, particularly in relation to the motivation for adopting hybrid instruments as an element of firm capital structure, and the impact of putting this choice into effect. In this paper, we examine two key themes. First, we analyse the extent to which the rise of hybrid instruments can be justified on the grounds that the use of these instruments can result in lower firm cost of capital. We also investigate the impact on firm financial reports and key metrics of financial performance of risk which result from the deployment of hybrid financial instruments as components of firm capital structure. We conclude by expressing scepticism as to the proposition that the use of hybrid instruments systematically lowers issuer cost of capital, and argue that the use of hybrid instruments has caused material distortions to emerge within the financial statements of firms which employ them.

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