Callahan, Smith, and Spencer studied firms affected by FIN 46 during the period 1998-2005. After controlling the other factors affecting cost of capital, they found that the cost of capital of firms affected by Fin 46 (and which thus had to either consolidate their VIEs or issue ELNs to avoid consoildation) increased on average afte 2003, relative to a control sample of firms that were unaffected by FIn 46. For those firms affected by fin 46 that avoided consoilation thorugh ELNs, the authors found that their increase in cost of capital was less than the increase for those affected that did consoldiate.
Required:
a. Give an explanation for these results that is consistent with securities market efficiency.
b. Give an explanation that is consistent with behaviorally biased investors.
c. How did the FASB and IASB respond to the consolidation loophole of ELNs in FIN 46?
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Callahan, Smith, and Spencer studied firms affected by FIN 46 during the period 1998-2005. After con...
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