IDEAS home Printed from https://ideas.repec.org/a/taf/euract/v24y2015i4p801-822.html
   My bibliography  Save this article

The Impact of Debt-Equity Reporting Classifications on the Firm's Decision to Issue Hybrid Securities

Author

Listed:
  • Shai Levi
  • Benjamin Segal

Abstract

We test the influence of classification of securities into liabilities and equity on firms' financing choices, using as our setting the change in reporting classification of hybrid securities following SFAS 150. We find that this change affected the decision of firms to issue mandatorily redeemable preferred shares (MRPS). Following the requirement that firms classify the debt-like hybrid security MRPS as a liability, the share of MRPS issuances in firms' new financing declined. Characteristics of firms issuing MRPS also changed. While prior to SFAS 150 firms with higher levels of debt and lower coverage ratios chose to issue MRPS and not debt, after its adoption, the decision to issue MRPS is no longer related to firms' pre-existing debt and coverage levels. Furthermore, our results indicate that before SFAS 150 managers were willing to bear the higher issuance fees of MRPS and chose to issue these debt-like hybrid securities over cheaper debt. The requirement to classify debt-like hybrids as a liability took away the reporting incentives for issuance and made these securities a less popular financing vehicle.

Suggested Citation

  • Shai Levi & Benjamin Segal, 2015. "The Impact of Debt-Equity Reporting Classifications on the Firm's Decision to Issue Hybrid Securities," European Accounting Review, Taylor & Francis Journals, vol. 24(4), pages 801-822, December.
    • Handle: RePEc:taf:euract:v:24:y:2015:i:4:p:801-822
    DOI: 10.1080/09638180.2014.909290
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/09638180.2014.909290
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/09638180.2014.909290?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hovakimian, Armen & Opler, Tim & Titman, Sheridan, 2001. "The Debt-Equity Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(1), pages 1-24, March.
    2. MacKie-Mason, Jeffrey K, 1990. "Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-1493, December.
    3. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    4. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    5. Michael C. Jensen, 2010. "Value Maximization, Stakeholder Theory, and the Corporate Objective Function," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 32-42, January.
    6. Thomas W. Scott & Christine I. Wiedman & Heather A. Wier, 2011. "Transaction Structuring and Canadian Convertible Debt," Contemporary Accounting Research, John Wiley & Sons, vol. 28(3), pages 1046-1071, September.
    7. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    8. Sweeney, Amy Patricia, 1994. "Debt-covenant violations and managers' accounting responses," Journal of Accounting and Economics, Elsevier, vol. 17(3), pages 281-308, May.
    9. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    10. Fama, Eugene F. & French, Kenneth R., 2005. "Financing decisions: who issues stock?," Journal of Financial Economics, Elsevier, vol. 76(3), pages 549-582, June.
    11. Leland, Hayne E, 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
    12. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, vol. 67(2), pages 217-248, February.
    13. Alissa, Walid & Bonsall, Samuel B. & Koharki, Kevin & Penn, Michael W., 2013. "Firms' use of accounting discretion to influence their credit ratings," Journal of Accounting and Economics, Elsevier, vol. 55(2), pages 129-147.
    14. Engel, E & Erickson, M & Maydew, E, 1999. "Debt-equity hybrid securities," Journal of Accounting Research, Wiley Blackwell, vol. 37(2), pages 249-274.
    15. Ryan Ball & Robert M. Bushman & Florin P. Vasvari, 2008. "The Debt‐Contracting Value of Accounting Information and Loan Syndicate Structure," Journal of Accounting Research, Wiley Blackwell, vol. 46(2), pages 247-287, May.
    16. Holthausen, Robert W. & Watts, Ross L., 2001. "The relevance of the value-relevance literature for financial accounting standard setting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 3-75, September.
    17. Walid M. Alissa & Samuel B. Bonsall Iv & Kevin Koharki & Michael W. Penn Jr., 2013. "Firms' use of accounting discretion to influence their credit ratings," Post-Print hal-01069190, HAL.
    18. Abe De Jong & Miguel Rosellón & Patrick Verwijmeren, 2006. "The Economic Consequences of IFRS: The Impact of IAS 32 on Preference Shares in the Netherlands," Accounting in Europe, Taylor & Francis Journals, vol. 3(1), pages 169-185, October.
    19. Imhoff, E.A. & Thomas, J.K., 1988. "Economic Consequences Of Accounting Standards: The Lease Disclosure Rule Change," Papers fb-_88-36, Columbia - Graduate School of Business.
    20. Ilia D. Dichev & Douglas J. Skinner, 2002. "Large–Sample Evidence on the Debt Covenant Hypothesis," Journal of Accounting Research, Wiley Blackwell, vol. 40(4), pages 1091-1123, September.
    21. DeFond, Mark L. & Jiambalvo, James, 1994. "Debt covenant violation and manipulation of accruals," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 145-176, January.
    22. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    23. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    24. Michael L. Lemmon & Michael R. Roberts & Jaime F. Zender, 2008. "Back to the Beginning: Persistence and the Cross‐Section of Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 63(4), pages 1575-1608, August.
    25. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    26. Mukesh Bajaj & Sumon C. Mazumdar & Atulya Sarin, 2002. "The Costs of Issuing Preferred Stock," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 25(4), pages 577-592, December.
    27. Lee, Hei Wai & Figlewicz, Raymond E., 1999. "Characteristics of firms that issue convertible debt versus convertible preferred stock," The Quarterly Review of Economics and Finance, Elsevier, vol. 39(4), pages 547-563.
    28. Hopkins, PE, 1996. "The effect of financial statement classification of hybrid financial instruments on financial analysts' stock price judgments," Journal of Accounting Research, Wiley Blackwell, vol. 34, pages 33-50.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ryu, Doojin & Yu, Jinyoung, 2020. "Hybrid bond issuances by insurance firms," Emerging Markets Review, Elsevier, vol. 45(C).
    2. Janni Grouleff Nielsen & Rainer Lueg & Dennis van Liempd, 2019. "Managing Multiple Logics: The Role of Performance Measurement Systems in Social Enterprises," Sustainability, MDPI, vol. 11(8), pages 1-23, April.
    3. Dean Hanlon, 2019. "Mandatory accounting change and debt covenant violation: Additional evidence from SFAS 150," Australian Journal of Management, Australian School of Business, vol. 44(3), pages 355-387, August.
    4. Pascal Barneto & Stéphane Ouvrard & Yves Rannou, 2019. "Les titres hybrides : de leur émission à leur classement comptable. Un enjeu de contrôle ?," Post-Print hal-02311469, HAL.
    5. Shai Levi & Benjamin Segal & Dan Segal, 2021. "Does fiduciary duty to creditors reduce debt covenant violation avoidance behavior?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(5-6), pages 929-953, May.
    6. Ali Gungoraydinoglu & Özde Öztekin, 2021. "Financial Leverage and Debt Maturity Targeting: International Evidence," JRFM, MDPI, vol. 14(9), pages 1-36, September.
    7. Neil Fargher & Baljit K. Sidhu & Ann Tarca & Warrick van Zyl, 2019. "Accounting for financial instruments with characteristics of debt and equity: finding a way forward," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 59(1), pages 7-58, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bontempi, Maria Elena & Bottazzi, Laura & Golinelli, Roberto, 2020. "A multilevel index of heterogeneous short-term and long-term debt dynamics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    2. Wu, Xueping & Au Yeung, Chau Kin, 2012. "Firm growth type and capital structure persistence," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3427-3443.
    3. Bolton, Patrick & Li, Ye & Wang, Neng & Yang, Jinqiang, 2020. "Dynamic Banking and the Value of Deposits," Working Paper Series 2020-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    4. Saumitra, Bhaduri, 2012. "Why do firms issue equity? Some evidence from an emerging economy, India," MPRA Paper 38043, University Library of Munich, Germany.
    5. Stöckl Matthias & Winner Hannes, 2013. "Körperschaftsbesteuerung und Unternehmensverschuldung: Evidenz aus einem Europäischen Firmenpanel / Capital Structure and Corporate Taxation: Empirical Evidence from European Panel Data," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 233(2), pages 188-205, April.
    6. Devos, Erik & Rahman, Shofiqur & Tsang, Desmond, 2017. "Debt covenants and the speed of capital structure adjustment," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 1-18.
    7. Byung-Chul Ju, 2024. "Capital Structure Dynamics: Evidence from the Korean Listing Market," Sustainability, MDPI, vol. 16(11), pages 1-22, May.
    8. Andres, Christian & Cumming, Douglas & Karabiber, Timur & Schweizer, Denis, 2014. "Do markets anticipate capital structure decisions? — Feedback effects in equity liquidity," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 133-156.
    9. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2014. "Asymmetric adjustment toward optimal capital structure: Evidence from a crisis," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 226-242.
    10. Harford, Jarrad & Klasa, Sandy & Walcott, Nathan, 2009. "Do firms have leverage targets? Evidence from acquisitions," Journal of Financial Economics, Elsevier, vol. 93(1), pages 1-14, July.
    11. Pinto, João M. & Silva, Cátia S., 2021. "Does export intensity affect corporate leverage? Evidence from Portuguese SMEs," Finance Research Letters, Elsevier, vol. 38(C).
    12. Mohamed Soufeljil & Asma Sghaier & Zouhayer Mighri & Hanène Kheireddine, 2017. "The financial structure of the Tunisian listed businesses: an application on panel data," Journal of Global Entrepreneurship Research, Springer;UNESCO Chair in Entrepreneurship, vol. 7(1), pages 1-25, December.
    13. Bipin Sony & Saumitra Bhaduri, 2018. "Information Asymmetry and Debt–Equity Choice: Evidence from an Emerging Market, India," Review of Market Integration, India Development Foundation, vol. 10(3), pages 228-252, December.
    14. Rebel A. Cole, 2013. "What Do We Know about the Capital Structure of Privately Held US Firms? Evidence from the Surveys of Small Business Finance," Financial Management, Financial Management Association International, vol. 42(4), pages 777-813, December.
    15. Diana Bonfim & Paula Antão, 2012. "The dynamics of capital structure decisions," Working Papers w201206, Banco de Portugal, Economics and Research Department.
    16. Leary, Mark T. & Roberts, Michael R., 2010. "The pecking order, debt capacity, and information asymmetry," Journal of Financial Economics, Elsevier, vol. 95(3), pages 332-355, March.
    17. M. E. Bontempi & L. Bottazzi & R. Golinelli, 2015. "Dynamic corporate capital structure behavior: empirical assessment in the light of heterogeneity and non stationarity," Working Papers wp988, Dipartimento Scienze Economiche, Universita' di Bologna.
    18. Peter Brusov & Tatiana Filatova, 2023. "Capital Structure Theory: Past, Present, Future," Mathematics, MDPI, vol. 11(3), pages 1-30, January.
    19. Didier Brandao,Tatiana & Levine,Ross Eric & Schmukler,Sergio L., 2015. "Capital market financing, firm growth, and firm size distribution," Policy Research Working Paper Series 7353, The World Bank.
    20. Mai, Nhat Chi, 2012. "Market timing, taxes and capital structure: evidence from Vietnam," OSF Preprints t3mvs, Center for Open Science.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:euract:v:24:y:2015:i:4:p:801-822. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/REAR20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.