Page 1

VOLUME 23 | NUMBER 1 | WiNtER 2011

APPLIED CORPORATE FINANCE

Journal of

A MORGAN STANLEY PUBLICATION

In This Issue: Corporate Productivity and the Wealth of Nations

Growth and Renewal in the United States: Retooling America’s

Roland Füss, Nico Rottke, and Joachim Zietz,

EBS Universität für Wirtschaft und Recht

Comply or Explain: investor Protection through the italian Corporate

Governance Code

107

Marcello Bianchi, Angela Ciavarella, Valerio Novembre,

Rossella Signoretti, CONSOB

Page 2

Journal of Applied Corporate Finance • Volume 23 Number 1 A Morgan Stanley Publication • Winter 2011 77

Deleveraging Corporate America:

Job and Business Recovery Through Debt Restructuring

1. Boston Consulting Group (2009) and Milken Institute Global Conference panel,

“Corporate Debt Financing and Economic Recovery,” April 2009. Full citations of all

sources appear in the References section at the end.

2. For further discussion, see Andrade and Kaplan (1998) and Gilson (1997).

3. For more discussion of capital structure, see Allen and Yago (2010).

4. Also see Almeida and Philipon (2010).

5. For further discussion, see Gilson and Lang (1990).

6. See, for example, Song (2009).

cial distress resulting from frozen credit markets.1 At the start

of the crisis, most companies had the operating margins and

underlying profitability needed to survive. What they lacked

was the flexibility to adjust their capital structures under exist-

ing tax and regulatory policies.2

Capital structure—that is, the combination of equity,

debt, or hybrid securities with which a company finances

its assets—can have significant effects on value as firms try

to match their business strategies with the capital resources

to fund their operations and investments in future growth.3

Providing sufficient flexibility in capital structure became

critically important as the economic crisis deepened and

overall demand plummeted. And even as we write in early

2011, the financial deleveraging and associated effects—

including bankruptcies, plant and facilities closings, and

job losses—that often follow such economic disruptions

continue to threaten the nation’s companies, employment,

and recovery.

Such consequences have been partly averted by policies

that reintroduced the flexibility to deleverage through equity

and debt exchanges—primarily the deferral of cancellation

of debt income (CODI). This provision, which added section

108(i) to the tax code, was included in the American Recov-

ery and Reinvestment Act (ARRA) of 2009. As a result,

The deleveraging efforts that resulted from the ARRA

provision have helped stave off further financial distress

and possibly economic meltdown. Policymakers correctly

understood that massive business failures would ultimately

be more costly to government budgets than the deferral of

tax revenues.

s the Great Recession roiled capital and labor

markets in early 2009, up to a third of U.S.

public corporations, and nearly 60% of privately

owned companies, reported high levels of finan-

Nevertheless, the possibility of a new wave of distressed

debt exchanges now looms large with the expiration next

year of the CODI deferral. With a “wall of maturities”

of $800 billion in corporate debt that must be paid off or

refinanced from 2012 through 2014, it is important to assess,

and attempt to learn from, the benefits of the CODI deferral

policy. Given the demonstrated effects of this tax change that

are summarized in this paper, we suggest that either that the

deferral of CODI be extended (or that the taxation of CODI

be eliminated altogether; as discussed below, the tax provision

was introduced in the early 1990s, and in circumstances very

different from today’s).

A company’s financial woes and the debt market’s percep-

tion of risk can raise the firm’s financing costs and reduce

its ability to weather economic downturns.4 The policy logic

of restructuring is clear: Out-of court restructurings have

proven considerably less costly than bankruptcies to debtor

companies, and have been accompanied by lower public

costs associated with firm closings, such as unemployment

payments, greater need for social services, and lost tax

revenues.5 The financial capacity gained from restructuring

obligations and the activities leading up to it can encourage

economic recovery. Also, there is a growing body of research

suggesting that prolonged financial distress among companies

is amplified in the broader economy by negative asset pricing

and increased volatility.6 Failing to deleverage under such

circumstances increases losses in equity valuation, employ-

ment, and government revenue; contributes to bankruptcies;

and increases the pressure for deficit spending.

financial markets were reeling from a credit crunch as well a

liquidity freeze. The credit market meltdown made it difficult

for financial institutions and non-financial businesses alike to

roll over short-term debt and obtain the funds necessary for

daily operations. Credit spreads soared to historic highs in the

second half of 2008 and failed to narrow, despite the Federal

by Glenn Yago and Tong Li, Milken Institute

Page 3

78 Journal of Applied Corporate Finance • Volume 23 Number 1 A Morgan Stanley Publication • Winter 2011

7. Bullock (2009).

8. See Barth, Klowden and Yago (2008) and Wagman (2009).

9. See Beck (2004), PricewaterhouseCoopers (2006), Guad, Hoesli, and Bender

(2007), and Morimoto, Fujii, Horibe and Mizutani (2009).

10. See Myers (1977). Allen et al. (2008) provided an excellent summary of the

development of corporate finance theory and Myer’s contribution with regards financial

structure’s effects on corporate decisions in a less-than-perfect world. In an empirical

study, Hennessy (2004) provided evidence of such underinvestment when companies

are worried about defaulting on existing debt. On the theoretical front, there has also

been a growing body of literature in the past two decades to model strategic dynamic

capital structure decisions. A recent study by Sundaresan and Wang (2007), for exam-

ple, developed a dynamic framework in which firms optimize their investment and de-

fault decisions over time and trade off tax benefits of debt with both distress and agency

costs of debt. Their model showed that existing debt can induce debt overhang, risk

shifting and other distortions. Furthermore, Chen and Manso (2010) used a dynamic

capital structure/real option model and pointed out that the costs of debt overhang be-

come significantly higher at times of economic turbulence.

11. As stated Grigorian and Raei (2010).

the aim of strengthening their balance sheets. This ability to

reduce debt without incurring a tax burden was a fundamen-

tal reason why relatively few companies defaulted in the 1970s

and 1980s. When the economy stalled, companies were able

to attract investors, maintain their investment and value, and

generally forestall bankruptcy, thereby preserving jobs. Many

companies whose debt was considered extremely risky in the

1970s—companies such as Westinghouse, Tandy, Teledyne,

and many others—found ways to deleverage their capital

structures and return to profitability. And in the early 1980s,

companies like International Harvester, Occidental Petro-

leum, and other traditional industrial companies were able to

reduce leverage by issuing equity in exchange for debt.

It wasn’t until the early 1990s that companies largely

lost this flexibility, thanks to regulatory changes that made

debt reduction a taxable event.8 The justification for this

regulatory and tax change was primarily to prevent profit-

able companies from taking advantage of the discounts

at which their debt was trading due to the then changing

interest rate environment. That regulatory change put U.S.

firms at a serious disadvantage compared to peers in Europe,

Japan, and other nations with more favorable tax treatment

of exchange offers. Particularly common in Europe were

debt restructurings facilitated by the routine practice of

bondholders, shareholders, employees, and government

officials of starting to negotiate workouts of companies

that were only expected to have difficulty meeting upcom-

ing principal repayments.9

Advantages of Deleveraging

In a 1977 finance classic called “Determinants of Corporate

Borrowing,” Stewart Myers demonstrated how a company’s

decision to raise new capital and undertake new investment

can be affected by the threat of default on its outstanding debt.

The resulting “underinvestment problem,” also known as “debt

overhang,” discourages companies from making promising

new investments—and from issuing the new equity or debt

that might enable them to undertake those investments.10

The aim of corporate debt restructuring has been well

described as “a timely and orderly restructuring of corporate

liabilities with a view to restoring the corporations’ opera-

tion and financial viability.”11 Lenders and borrowers suffer

when debt trades at distressed prices. And reworking the debt,

either by writing down or extending the principal, is one way

to address this corporate debt overhang problem.

Reserve’s efforts to keep interest rates at nearly zero. Although

the corporate bond and leveraged loan markets recovered

somewhat and functioned fairly well in 2009, bank lending

to households and non-financial businesses remained weak.

In addition, businesses faced uncertainties in the equity

and bond markets. The market value of equities and corpo-

rate bonds fell sharply during the crisis. This was due in part

to the inability of risk-averse investors to distinguish funda-

mentally sound and solvent from failing companies, resulting

in a general overestimation of the probability of default for

most companies. According to Moody’s, recoveries on corpo-

rate loans in default were as low as 52 cents on the dollar, as

compared to 87 cents before the crisis. Recoveries on senior

unsecured debt were as little as 15 cents on the dollar, as

compared to 40 cents in normal times.7 But, as conditions

improved in 2009, credit spreads narrowed and actual losses

on corporate defaults turned out to be less severe than inves-

tors expected.

The liquidity freeze lowered the market value of business

loans and bonds. But while lenders experienced sizeable losses

in the market values of their assets, borrowers’ debt service

requirements were still based, of course, on the face value of

the outstanding debt, even if their debt was trading at deep

discounts. Net leverage covenants—those specifying an upper

bound on a business’s debt (net of cash) to EBITDA—and

other binding covenants also limited companies’ ability to

navigate an economic crisis of such magnitude. And without

the suspension of the CODI tax and the opportunity to

deleverage, capital expenditures by companies under financial

stress would have fallen even more than they did in response

to the deteriorating national economy.

In sum, under conditions of economic stress, compa-

nies without the cash to retire debt often need the ability

to deleverage without a tax penalty so they can obtain

more favorable repayment conditions and an advantageous

capital structure to weather economic downturns. Such debt

for more productive uses, such as meeting payrolls, investing

in capital expenditures on machinery and equipment, and

new projects and market development.

During the credit crunch that began in 1974 and in

later restructurings in the 1980s, for example, U.S. compa-

nies were able to adjust their capital structures to market

conditions—selling debt or equity, or exchanging debt for

equity when market conditions were most receptive—with

Page 4

79 Journal of Applied Corporate Finance • Volume 23 Number 1 A Morgan Stanley Publication • Winter 2011

12. See Brealey, Myers, and Allen (2010).

13. For further discussion, see Lie, Lie, and McConnell (2001).

ing leverage improves the general quality of corporate debt

outstanding in the public markets.

Successful exchange offers that reduce a company’s lever-

age also generally reduce the likelihood that the firm will

enter Chapter 11, thereby avoiding the costs of bankruptcy.13

These costs include not only direct effects, such as the legal

and administrative costs of reorganizing the firm, but also

indirect—and potentially much larger, effects such as forgone

business and investment opportunities. Bankruptcies also can

hurt the local economy as job opportunities are eliminated

and related industries are affected.

Taken as a whole, these benefits suggest that the suspen-

sion and possible elimination of the CODI tax is likely to

have been an effective, targeted stimulus measure—one that

has reduced economic volatility and saved jobs.

The Legislation: Before and After

The cancellation of indebtedness legislation was first intro-

duced in the Senate by Sen. John Ensign on January 6, 2009.

The proposal recommended temporarily suspending the

cancellation of debt rules of Sections 61(a)(12) and 108(e)(4)

of the Internal Revenue Code. The Mortgage Forgiveness

Debt Relief Act of 2007 took a similar approach with home-

A plan to restructure a company’s outstanding debt

securities can involve the use of cash, but it need not. The

alternatives include:

•? Cash redemption: A company can choose to redeem

its debt if the terms of the debt permit it. Redemption can be

an unattractive option if the contracted redemption price is

the face amount or at a premium. For a financially distressed

company, the cash paid to redeem the debt will usually exceed

the debt’s market value.

•? Cash purchases: A company can also directly acquire

its outstanding debt securities from the open market through

private negotiations, sometimes at a significant discount.

•? Cash tender offer: A company can make a public offer

stating its intention to purchase outstanding debt securities,

sometimes at a significant discount.

•? Exchange offer: When a company lacks the cash for

the alternatives above, it can make an offer to its creditors

to exchange newly issued debt or equity securities for the

outstanding debt securities. This can also be done at a signifi-

cant discount to the face amount of the old securities.

In fact, there are several advantages to encouraging

companies to repurchase or restructure their outstanding

debt. Buying back debt that is trading at a (sometimes steep)

discount or swapping this debt for equity benefits both lenders

and borrowers by reducing uncertainty in the market.12

Uncertainty stemming from information asymmetry is one

of the greatest enemies of well-functioning credit markets.

Under most circumstances, borrowers have better informa-

tion about their financial conditions than their lenders and

investors. When borrowers believe their debt is trading at a

price far below what it is worth (after adjusting for risks), they

may choose to buy back this debt and perhaps replace it with

new debt with a lower face value and lower interest rates. And

lenders can benefit from the process as well. Although they

may not be able to recoup their entire investment, they are

often better off because they are now able to sell their debt

for more than a distressed debt market is offering.

Given such benefits, then, what now prevents compa-

nies from repurchasing debt that they know to be trading

below fair value? One reason, of course, is that companies

sometimes lack access to the necessary cash. But taxes are

another important concern. As noted, since a change to the

regulatory and tax code in the early 1990s, U.S. companies

have been required to include any forgiveness of debt princi-

pal in their calculation of taxable income. As a consequence,

when companies buy back debt at a deep discount, they are

likely to incur significant tax liabilities with no cash inflows

(apart from the reduction in interest payments) to help them

pay the taxes.

The Case for Extending CODI Deferral

Businesses, then, can benefit from the cancellation of debt if

they achieve a capital structure that is better suited to their

operations and development. When interest rates are drop-

ping, businesses are often able to negotiate a debt repurchase or

exchange offer to lower the cost of capital. Deferring the CODI

tax encourages these activities, helping businesses strengthen

their balance sheets and improve their capital structures.

In an economic downturn, the tax incentives provided

by this temporary suspension can also help bring the debt

market out of a downward spiral. Financial institutions,

need to maintain adequate capital. When the market is

distressed and the value of their holdings declines, financial

institutions try to sell the debt they are holding to rebuild

their capital reserves. This leads to fewer buyers and more

sellers in the market, further depressing prices. The deferral

of CODI helps break this cycle by encouraging issuers to

buy back debt and hence support the price of corporate debt.

Also, companies buying back debt below par and reduc-

Page 5

80Journal of Applied Corporate Finance • Volume 23 Number 1 A Morgan Stanley Publication • Winter 2011

14. For more information, visit the Bureau of Economic Analysis website (https://

www.bea.gov/regional/rims/).

in Table 1), we have assembled the most comprehensive data-

base to date.

All five databases were combined and duplications

removed. Both transaction-level and company-level data

were used. When a company declared its intention to defer

COD income, this information was included in the database.

Otherwise, transaction-level data were aggregated to produce

an estimate of potential savings from these transactions.

It should be noted that this database, although repre-

senting our best efforts to collect and distill the available

information, does not capture the entire universe of trans-

actions that can trigger the deferral of CODI. Although

companies can elect to defer income from the open market

repurchase of debt and from exchange offers (for new debt,

equity, or cash), income information from such transactions

is difficult to obtain. As a result, our database focuses mainly

on tender offers to repurchase corporate debt and exchange

offers. This limitation suggests that the ultimate economic

benefits of CODI deferral may well have been significantly

greater than our study suggests.

We collected information and financial data for individual

companies from Bloomberg. For the economic impact analy-

sis, we used the Regional Input-Output Modeling System

(RIMS II) tables published by the Bureau of Economic

Analysis.14

Methodology of Economic Impact Analysis

To be consistent with the RIMS II tables, we identified the

industry groups they belong to using the North American

Industry Classification System (NAICS). At the six-digital

NAICS level, our database includes 52 industries.

We carried out an economic impact analysis by measur-

ing the current effects of deferring CODI on final output,

corporate earnings, and job creation nationwide. To fully

Before the deferral of CODI was made possible, a

company was taxed on any income from debt restructuring

activities. If a company buys back its debt at a discount, the

company will generally recognize CODI in an amount equal

to the discount. In the case of a debt-for-debt exchange involv-

ing publicly traded debt, CODI is calculated as the amount

owed on the outstanding debt minus the fair market value

of the newly issued debt. Under the legislation, companies

can defer CODI for up to five years if the debt is canceled,

reacquired, or exchanged at a discount in 2009 or 2010. If a

company elects to use the CODI deferral provision, it must

state that election on tax form 108(i).

A surge of debt restructuring occurred after the legisla-

tion. In 2009, U.S. companies announced 630 tender offers

to repurchase debt, more than triple the number of repurchase

offers in 2008. The number of exchange offers announced

jumped from 537 in 2008 to 996 in 2009, an increase of

more than 85%. By eliminating the tax impediment to such

restructurings, the legislation effectively encouraged the

voluntary recapitalization of distressed firms. And while the

tax savings for reorganized companies were undoubtedly

viewed as “revenue losses” by the government, the increase

in the distressed companies’ cash flow that accompanied such

recapitalizations had other benefits that were spread through-

out the economy—benefits that may not have been realized

if the CODI had prevented such restructurings from taking

place outside Chapter 11.

Economic Impacts of Deferring CODI

One goal of our study to attempt to quantify the economic

effects of temporarily suspending the CODI rule. A major

difficulty we faced was the lack of a single source of accurate,

comprehensive and detailed information on debt restructur-

ing activities and their impacts. Using available sources (listed

Table 1 Summary of Data Sources

Source Description

Company filings When a company indicated in a public filing (such as a 10Q or 10K) that it would use the

CODI tax deferral, the total amount of CODI declared was included in our database.

Bloomberg We collected transaction-level data from Bloomberg and calculated CODI for each trans-

action when the data were available.

Mergent Mergent has comprehensive information on changes in capital. This database was used to

complement and verify information from the Bloomberg database.

Survey of brokers and managers This survey added some transaction-level information and some CODI from exchange

offers to the database.

A public search of COD transactions Additional information from publicly available sources was included in our database.

Page 6

81 Journal of Applied Corporate Finance • Volume 23 Number 1 A Morgan Stanley Publication • Winter 2011

15. It should be noted that our study is a partial equilibrium analysis examining the

policy impact in markets that are directly affected.

16. These companies are the current issuers of the debt. Some issuers subsequently

were acquired by or merged with other firms. In that case, the information of the acquir-

ers or newly formed companies is used for the analysis.

17. For example, the automobile industry support package cost $65 billion, generat-

ing 50,000 jobs at a cost of $1 million per job (based on “Rebuilding the American Auto

Industry,” U. S. Department of the Treasury, July 2010). For a more extensive examina-

tion of this link between tax policy and macroeconomic effects see: Christina D. Romer

and David H. Romer, “The Macroeconomic Effects of Tax Changes: Estimates on a New

Measure of Fiscal Shocks,” American Economic Review (100): 763-801.

repurchases and exchange offers were largely the means of

accomplishing these reductions in leverage. Based on the avail-

able information, in 2009 these companies paid $32.5 billion

to repurchased or exchange debt with a face value of $47.4

billion, resulting in $14.9 billion of total debt forgiveness.

Given what would have been reported as total cancel-

lation of debt income of $14.9 billion, we estimated the

potential temporary tax savings for these companies (using

different assumptions on tax rates) as starting at $3.89 billion

to $5.22 billion (or $3.59 billion to $4.81 billion if discounted

at the Treasury rate five years from 2009). To be conservative,

we used the lower end of this range for estimating deferred

CODI tax payments.

As summarized in Table 2, our analysis suggests that this

level of tax savings, when combined with the debt reduction

and magnified by the direct and indirect multiplier impacts

discussed earlier, created almost 90,000 jobs, over $3.2 billion

in earnings, and $10.7 billion in output that otherwise would

not have occurred. And viewed in these terms, the federal

tax expenditure was only $40,000 per job, a fraction of the

budgetary costs for other aspects of the stimulus package

dependent on direct government spending rather than tax

changes.17 And as can be seen in Table 3, these benefits

were spread across a variety of industries that have benefited

directly or indirectly from this tax change.

To the extent that this tax deferral is not extended

or made permanent, much of these benefits could prove to

be temporary.

Conclusion and Policy Implications

Measures to encourage restructuring of corporate debt—

especially the deferral of income from cancellation of debt

(CODI)—have been a critical component of the federal

government’s policies to accelerate recovery and job growth.

Deferring CODI represents a hybrid approach to corporate

debt restructuring in the sense that it combines tax incentives

with market-based, voluntary, and case-by-case negotiations.

To be sure, this approach could lead to a temporary increase

in the federal budget deficit. But unlike some measures the

federal government has used to stimulate the economy, the

deferral of CODI is a targeted financial policy tool that is

aimed directly at boosting the productive capacity and

employment of corporate enterprises. By encouraging and

enabling timely restructuring of debt, this tax incentive helps

sustain potentially viable companies and avoids the direct and

indirect costs related to possible bankruptcies. These activities

shore up distressed companies’ balance sheets, help stabilize

capture the contribution of economic impacts stemming

from the tax deferral for each industry involved, we applied

multipliers calculated by the Bureau of Economic Analysis

(as provided in the national RIM II tables). These multipliers

enabled us to estimate how the increased employment and

output generated by the deferral rippled through other aspects

of total factor demand and ultimately affected other economic

sectors nationwide. The extent of such an effect is typically

transmitted through an industry’s supply chain.

Take the auto manufacturing industry as an example.

Suppliers, outside contractors, and other businesses that

cater directly to the large auto manufacturers can be viewed

as part of this network. Such “satellite” businesses in turn

use the goods and services of still other businesses, further

Summary of Findings

We assembled a sample data set consisting of 110 companies

that, after the ARRA was signed into law in 2009, announced

and completed exchange offers and/or tender offers to repur-

chase debt at a discount.16 These companies represented $2.2

trillion in total assets, $520 billion in total market cap, and

2.2 million employees who were at risk of bankruptcy and

liquidation during the financial crisis.

To begin with, 73% of these at-risk companies had lower

leverage ratios in 2009 than in 2008; and 68% of these firms

saw a decline in long-term borrowings outstanding. And debt

Earnings and Employment

MultiplierTotal impact

Output 2.76$10.7 billion

Earnings0.83$3.2 billion

Employment26.01 89,140

Source: Milken Institute

Note: Multipliers in this table are a weighted average of multipliers for all industries

included in our study

Page 7

82 Journal of Applied Corporate Finance • Volume 23 Number 1 A Morgan Stanley Publication • Winter 2011

Allen, Franklin and Glenn Yago, “Innovations in Business

Finance,” in Financing the Future: Market-Based Innovations

for Growth, Pearson, 2010.

Allen, Franklin, Bhattacharya, Sudipto, Rajan, Raghuram

G. and Schoar, Antoinette, “The Contributions of Stewart

Almeida, Heitor and Thomas Philippon, “The Risk-

Adjusted Cost of Financial Distress,” Journal of Finance,

Volume 62, Issue 6, December 2007.

Boston Consulting Group, Underestimating the Crisis,

Collateral Damage Series, 6, April 7, 2009.

Bryan Cave, Recovery Act Changes to Cancellation of Debt

Income, February 2009.

the credit market, and boost corporate liquidity—and along

with it, corporate investment and job growth.

The U.S. economy is traveling a bumpy road from reces-

sion to recovery. In the words of the International Monetary

Fund, “As countries now move from the initial crisis contain-

ment phase, a period of sustained corporate debt (and

operational) restructuring can be expected in order to repair

corporate balance sheets and to realign the corporate sector to

the post-crisis economy.”18 Taking economic and budgetary

conditions into account, Congress should consider extend-

ing the deferral of the CODI tax, or even eliminating the tax

completely. This will help ensure that U.S. companies can

continue to improve their balance sheets, contribute to the

recovery, and maintain the private sector’s role in ensuring

job creation and retention.

tong (cindy) li is a Research Economist in the Capital Studies group

at the Milken Institute. She specializes in hedge fund performance, the

U.S. mortgage market, banking regulations, and Chinese capital markets.

She is a co-author of The Rise and Fall of the U.S. Mortgage and Credit

Markets: A Comprehensive Analysis of the Meltdown.

glenn yago is Executive Director of Financial Research at the Milken

Institute and an authority on financial innovations, capital markets, emerg-

ing markets, and environmental finance. Yago directs the Koret–Milken

Institute Fellows Program, is a visiting professor at the Hebrew Univer-

sity of Jerusalem’s Graduate School of Business, and is the author of

five books, including Financing the Future, Restructuring Regulation and

Financial Institutions, Beyond Junk Bonds, and Global Edge.

Table 3 Economic Activities Generated From Tax Savings

Utilities 368661

Wholesale trade 335 1,716

Others1,61315,441

Total10,73789,140

Page 8

83 Journal of Applied Corporate Finance • Volume 23 Number 1 A Morgan Stanley Publication • Winter 2011

Morimoto, Tetsuya, Gerald M. Fujii, Tadao Horibe and

Takeo Mizutani, “How TMK Bond Buy-backs Can Work,”

International Tax Review, October 2009.

PricewaterhouseCoopers, “2006 tax reform subject to

thin capitalization rules,” Financial Services Tax News, Price-

waterhouseCoopers, July 2006.

Romer, Christina D. and David H. Romer, “The Macro-

Song, Qingyi, “Financial distress, the idiosyncratic

volatility puzzle and expected returns,” in Wharton School

Davis Polk & Wardwell, Restructuring Debt Securities:

Option and Legal Considerations, November 2008.

Ehrlich, Everett, Temporarily Suspending the Recognition of

Income from the Repurchase of Below-Par Business Debts, ESC

Company, January 2009.

Gilson, Stuart C. Kose John, and Larry H.P. Lang,

“Troubled Debt Restructurings, An Empirical Study of

Private Reorganization of Firms in Default,” Journal of Finan-

cial Economics, 25, 315-353, 1990.

Gilson, Stuart, “Transactions Costs and Capital Struc-

ture Choice: Evidence from Financially Distressed Firms,”

Journal of Finance, 52, 161-196, 1997.

Grigorian, David A. and Faezeh Raei, “Government

Involvement in Corporate Debt Restructuring: Case Studies

from the Great Recession,” IMF Working Paper WP/10/260,

November 2010.

Guad, Philippe, Martin Hoesli, and Andre Bender,

“Debt-Equity Choice in Europe,” International Review of

Financial Analysis, 16/3 (2007):201-222. Hagan, Sean,

Page 9

Journal of Applied Corporate Finance (ISSN 1078-1196 [print], ISSN

1745-6622 [online]) is published quarterly, on behalf of Morgan Stanley by

Wiley Subscription Services, Inc. a Wiley Company, 111 River St. Hoboken,

NJ 07030-5774. Postmaster: Send all address changes to JOURNAL OF

APPLIED CORPORATE FINANCE Journal Customer Services, John Wiley &

Sons Inc. 350 Main St. Malden, MA 02148-5020.

information for Subscribers Journal of Applied Corporate Finance is pub-

lished in four issues per year. Institutional subscription prices for 2011 are:

Print & Online: US$441 (US), US$529 (Rest of World), €343 (Europe),

£271 (UK). Commercial subscription prices for 2010 are: Print & Online:

US$590 (US), US$703 (Rest of World), €455 (Europe), £359 (UK).

Individual subscription prices for 2010 are: Print & Online: US$105 (US),

Prices are exclusive of tax. Australian GST, Canadian GST and European

VAT will be applied at the appropriate rates. For more information on cur-

rent tax rates, please go to www.wileyonlinelibrary.com/tax-vat. The institu-

tional price includes online access to the current and all online back files to

January 1st 2007, where available. For other pricing options, including

access information and terms and conditions, please visit www.wileyonlineli-

brary.com/access

Journal Customer Services: For ordering information, claims and any inquiry

concerning your journal subscription please go to www.wileycustomerhelp.

com/ask or contact your nearest office.

Americas: Email: cs-journals@wiley.com; Tel: +1 781 388 8598 or

+1 800 835 6770 (toll free in the USA & Canada).

Europe, Middle East and Africa: Email: cs-journals@wiley.com;

Tel: +44 (0) 1865 778315.

Asia Pacific: Email: cs-journals@wiley.com; Tel: +65 6511 8000.

Japan: For Japanese speaking support, Email: cs-japan@wiley.com;

Tel: +65 6511 8010 or Tel (toll-free): 005 316 50 480.

Visit our Online Customer Get-Help available in 6 languages at

www.wileycustomerhelp.com

Production Editor: Joshua Gannon (email:jacf@wiley.com).

Delivery terms and Legal title Where the subscription price includes print

issues and delivery is to the recipient’s address, delivery terms are Delivered

Duty Unpaid (DDU); the recipient is responsible for paying any import duty or

taxes. Title to all issues transfers FOB our shipping point, freight prepaid. We

will endeavour to fulfil claims for missing or damaged copies within six months

of publication, within our reasonable discretion and subject to availability.

Back issues Single issues from current and recent volumes are available at

the current single issue price from cs-journals@wiley.com. Earlier issues may

be obtained from Periodicals Service Company, 11 Main Street, German-

town, NY 12526, USA. Tel: +1 518 537 4700, Fax: +1 518 537 5899,

Email: psc@periodicals.com

This journal is available online at Wiley Online Library. Visit www.wileyon-

linelibrary.com to search the articles and register for table of contents e-mail

alerts.

Access to this journal is available free online within institutions in the devel-

oping world through the AGORA initiative with the FAO, the HINARI initiative

with the WHO and the OARE initiative with UNEP. For information, visit

www.aginternetwork.org, www.healthinternetwork.org, www.healthinternet-

work.org, www.oarescience.org, www.oarescience.org

Wiley’s Corporate Citizenship initiative seeks to address the environmental,

social, economic, and ethical challenges faced in our business and which are

important to our diverse stakeholder groups. We have made a long-term com-

mitment to standardize and improve our efforts around the world to reduce

our carbon footprint. Follow our progress at www.wiley.com/go/citizenship

Abstracting and indexing Services

The Journal is indexed by Accounting and Tax Index, Emerald Management

Reviews (Online Edition), Environmental Science and Pollution Management,

Risk Abstracts (Online Edition), and Banking Information Index.

Disclaimer The Publisher, Morgan Stanley, its affiliates, and the Editor

cannot be held responsible for errors or any consequences arising from

the use of information contained in this journal. The views and opinions

expressed in this journal do not necessarily represent those of the

Publisher, Morgan Stanley, its affiliates, and Editor, neither does the pub-

lication of advertisements constitute any endorsement by the Publisher,

Morgan Stanley, its affiliates, and Editor of the products advertised. No person

should purchase or sell any security or asset in reliance on any information in

this journal.

Morgan Stanley is a full-service financial services company active in

the securities, investment management, and credit services businesses.

Morgan Stanley may have and may seek to have business relationships with

any person or company named in this journal.

cation may be reproduced, stored or transmitted in any form or by any means