Balance sheet classification of compound financial instruments and the judgment of securities market analysts
DOI:
https://doi.org/10.18533/jefs.v4i05.264Keywords:
securities market analyst, compound financial instrument, balance-sheet management, IAS n. 32Abstract
This paper investigate the effect of balance sheet classification of a compound financial instrument on the analyst’s judgment on estimates in target prices using an experimental settings. The experimental design involves both buy and sales-side analysts grouped into three subsamples with limited information set about the company used in the experiment and different information regarding the accounting for the compound financial instrument (IAS 32 model, SOA model and NEA model) after the following event: a private placement of a mandatorily convertible debenture to finance the acquisition of another company abroad. We apply nonparametric means and bootstrap test. Our result show that regardless of balance sheet classification of the compound financial instrument, analysts are likely to treat it conservatively as a liability. Moreover, if the compound financial instrument is wholly classified as a liability and the company is highly leveraged, they tend to discount firm’s share price.References
Abhyankar, A.; Dunning, A. (1999). Wealth effects of convertible bond and convertible preference share issues: An empirical analysis of the UK market. Journal of Banking and Finance, (23), 7, p. 1043-1065.
Ammann, M.; Fehr, M.; Seiz, R. (2006). New evidence of the announcement effect of convertible and exchangeable bonds. Journal of Multinational Financial Management, 16 (1), 43-63.
Ammann, M.; kind, A.; Wilde, C (2003). Are convertible bonds underpriced? An analysis of the French market. Journal of Banking and Finance, 27, p. 635-653.
Asquit, P. Convertible bonds are not called late (1995). The Journal of Finance, 50 (4), p. 1275-1289.
Aoyama, H (2007). Hybrid securities: a comparative study between the US and Japan. http://www.law.harvard.edu/programs/about/pifs/education/llm/2006---2007/sp6.pdf.
Brazilian SEC (2013). Ofício-circular/CVM/SNC/SEP/n.º 01/2013. http://www.cvm.gov.br/port/atos/ oficios/oficio_circular_cvm_snc_sep_n_01_2013.pdf.
Cardoso, R. L (2005). Regulação econômica e escolhas de práticas contábeis: evidências no mercado de saúde suplementar brasileiro. PhD thesis. The University of São Paulo, Department of Accounting and Actuarial Sciences.
Dann, L.; Mikkelson, W. H (1984). Convertible debt-issuance, capital structure change and financing-related information: some new evidence. Journal of Financial Economics, 13 (2), p. 157-186.
Davidson, W. N.; Glascock, J. L.; Schwartz, T. V. (1995). Signaling with convertible debt. Journal of Financial and Quantitative Analysis, 30 (3), p. 425-440.
Eckbo, B. E. (1986). Valuation effects of corporate debt offerings. Journal of Financial Economics, 15, p. 119-151.
Efron, B.; Tibishirani, R. J. (1993). An introduction to the bootstrap. New York: John Wiley & Sons.
Hopkins, P. E. (1995). The effect of financial statement classification of mandatorily redeemable preferred stock on financial analysts’ stock price judgements: an experimental analysis. PhD Thesis. The University of Texas at Austin.
Hopkins, P. E. (1996). The Effect of financial statement classification of hybrid financial instruments on financial analysts’ stock price judgments. Journal of Accounting Research, 34. p. 33-50.
Iasb - International Accounting Standards Board. Discussion Paper DP/2013/1: a review of the conceptual framework for financial reporting. http://www.ifrs.org/current-projects/iasb-projects/conceptual-framework/discussion-paper-july-2013/documents/discussion-paper-conceptual-framework-july-2013.pdf
Lepage, R.; Billard, L. (1992). Exploring the limits of bootstrap. New York: John Wiley & Sons.
Martinez, A. L. (2011). The role of analysts as gatekkepers: enhancing transparency and curbing earning management in Brazil. Revista de Administração Contemporânea, (15) 4, p. 712-730.
Mikkelson, W. H.; Partch, M. M. (1986). Valuation effects of security offering and the issuance process. Journal of Financial Economics, (15), p. 31-60.
Myers, S. C.; Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, (13), p. 187-221.
Paulo, E. (2007). Manipulação das informações contábeis: uma análise teórica empírica sobre os modelos operacionais de detecção de gerenciamento de resultados. PhD Thesis. The University of São Paulo, Department of Accounting and Actuarial Sciences.
Roon, F.; Veld, C. (1998). Announcement effects of convertible bond loans and warrant-bond loans: an empirical analysis for the Dutch market. Journal of Banking and Finance, (22), p. 1481-1506.
Stein, J. C. (1992). Convertible bonds as "back door" equity financing. National Bureau of Economic Research: working paper n. 4028.
Swieringa, R. J.; Morse, D. (1985). Accounting for hybrid convertible debentures. The Accounting Review. (60) 1, p. 127-133.
Watts, R. L.; Zimmerman, J. L. (1986). Positive accounting theory. New Jersey: Prentice-hall, Englewood Cliffs.
Downloads
Published
Issue
Section
License
Authors who publish with this journal agree to the following terms:
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) after official publication, as it can lead to productive exchanges as well as greater citation of published work (See The Effect of Open Access).
