Alternative Risk Premia, Complexity and Bankruptcy Prediction : Behavioral and Asset-Pricing Anomalies In DERs and ASRs

Since 1990, there has been substantial debate in both the popular press and academic materials about earnings management by multinational companies and the capital markets (ie. microstructure; raising capital) effects of their rampant uses of Dividend-Equivalent Rights (“DERs”) and Accelerated Stock Repurchases (“ASRs”). DERs and ASRs have become popular but inefficient corporate governance, financing and risk management instruments among large and medium companies globally and have significant implications for incentives, portfolio management, asset pricing and corporate financing. DERs and ASRs are regulated by national securities and accounting regulations (eg. IASB/IFRS), but the affected companies also operate in foreign countries. This article contributes to the literature in the following ways: i) explains why ASR programs and DERs are problematic/inefficient and why the generally accepted accounting methods for them are wrong – these issues represent both behavioral anomalies (by both investors and firm managers) and asset pricing anomalies; ii) two major implications are that DERs and ASRs may distort firms' cost-of-capital, financing and opportunity sets, and that as noted in the academic and practitioner finance literature DERs and ASRs carry significant information content and can be exploited to generate alternative risk premia; iii) introduces new theories of Corporate Governance and Enterprise Risk Management; iv) explains how the existence and use of DERs and ARSs contravenes many finance theories