IDEAS home Printed from https://ideas.repec.org/a/bla/joares/v54y2016i5p1267-1296.html
   My bibliography  Save this article

How Do Experienced Users Evaluate Hybrid Financial Instruments?

Author

Listed:
  • SHANA CLOR‐PROELL
  • LISA KOONCE
  • BRIAN WHITE

Abstract

Hybrid financial instruments contain features of both liabilities and equity. Standard setters continue to struggle with “getting the classification right” for these complex instruments. In this paper, we experimentally test whether the features of hybrid instruments affect the credit‐related judgments of experienced finance professionals, even when the hybrid instruments are already classified as liabilities or equity. Our results suggest that getting the classification right is not of primary importance for these experienced users, as they largely rely on the underlying features of the instrument to make their judgments. A second experiment shows that experienced users’ reliance on features generalizes to several features that often characterize hybrid instruments. However, we also find that experienced users vary in their beliefs about which individual features are most important in distinguishing between liabilities and equity. Together, our results highlight the importance of effective disclosure of hybrid instruments’ features.

Suggested Citation

  • Shana Clor‐Proell & Lisa Koonce & Brian White, 2016. "How Do Experienced Users Evaluate Hybrid Financial Instruments?," Journal of Accounting Research, Wiley Blackwell, vol. 54(5), pages 1267-1296, December.
    • Handle: RePEc:bla:joares:v:54:y:2016:i:5:p:1267-1296
    DOI: 10.1111/1475-679X.12129
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1475-679X.12129
    Download Restriction: no
    File URL: https://libkey.io/10.1111/1475-679X.12129?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
    ---><---

    References listed on IDEAS

    as
    1. Shah, Atul K., 1996. "Creative compliance in financial reporting," Accounting, Organizations and Society, Elsevier, vol. 21(1), pages 23-39, January.
    2. W. Brooke Elliott & Susan D. Krische & Mark E. Peecher, 2010. "Expected Mispricing: The Joint Influence of Accounting Transparency and Investor Base," Journal of Accounting Research, Wiley Blackwell, vol. 48(2), pages 343-381, May.
    3. Cowley, Elizabeth & Mitchell, Andrew A, 2003. "The Moderating Effect of Product Knowledge on the Learning and Organization of Product Information," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 30(3), pages 443-454, December.
    4. Ashton, Rh, 1974. "Experimental Study Of Internal Control Judgments," Journal of Accounting Research, Wiley Blackwell, vol. 12(1), pages 143-157.
    5. Shana Clor‐Proell & Mark W. Nelson, 2007. "Accounting Standards, Implementation Guidance, and Example‐Based Reasoning," Journal of Accounting Research, Wiley Blackwell, vol. 45(4), pages 699-730, September.
    6. Dutordoir, Marie & Lewis, Craig & Seward, James & Veld, Chris, 2014. "What we do and do not know about convertible bond financing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 3-20.
    7. 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. Borozan, Miloš & Loreta, Cannito & Riccardo, Palumbo, 2022. "Eye-tracking for the study of financial decision-making: A systematic review of the literature," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).
    2. 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.
    3. Ethan LaMothe & Donna Bobek, 2020. "Are Individuals More Willing to Lie to a Computer or a Human? Evidence from a Tax Compliance Setting," Journal of Business Ethics, Springer, vol. 167(2), pages 157-180, November.
    4. Kim, Young Jun & Choi, Sera & Lee, Eugenia Y. & Lee, Su Jeong, 2023. "Perpetual securities and stock prices: Korean evidence," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(1).
    5. Cascino, Stefano & Clatworthy, Mark A. & Osma, Beatriz Garcia & Gassen, Joachim & Imam, Shahed, 2021. "The usefulness of financial accounting information: evidence from the field," LSE Research Online Documents on Economics 107569, London School of Economics and Political Science, LSE Library.
    6. Tan, Hun-Tong & Wang, Elaine Ying & Yoo, G-Song, 2019. "Who likes jargon? The joint effect of jargon type and industry knowledge on investors’ judgments," Journal of Accounting and Economics, Elsevier, vol. 67(2), pages 416-437.
    7. Austin, Chelsea Rae & Bobek, Donna D. & Jackson, Scott, 2021. "Does prospect theory explain ethical decision making? Evidence from tax compliance," Accounting, Organizations and Society, Elsevier, vol. 94(C).

    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. Emett, Scott A. & Nelson, Mark W., 2017. "Reporting accounting changes and their multi-period effects," Accounting, Organizations and Society, Elsevier, vol. 57(C), pages 52-72.
    2. 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.
    3. Martin, Rachel, 2019. "Examination and implications of experimental research on investor perceptions," Journal of Accounting Literature, Elsevier, vol. 43(C), pages 145-169.
    4. Lachmann, Maik & Stefani, Ulrike & Wöhrmann, Arnt, 2015. "Fair value accounting for liabilities: Presentation format of credit risk changes and individual information processing," Accounting, Organizations and Society, Elsevier, vol. 41(C), pages 21-38.
    5. Florian Meier, 2020. "The Age of Cheap Money and Passive Investing: Are Pro Forma Earnings Value Relevant?," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 9(2), pages 1-1.
    6. Bach Q. Ho, 2024. "Customers’ Prior Knowledge in the Servitization of Traditional Handicrafts," Businesses, MDPI, vol. 4(1), pages 1-11, February.
    7. Berthon, Pierre & Pitt, Leyland F. & Campbell, Colin, 2009. "Does brand meaning exist in similarity or singularity?," Journal of Business Research, Elsevier, vol. 62(3), pages 356-361, March.
    8. Greenacre, Luke & Martin, James & Patrick, Sarah & Jaeger, Victoria, 2016. "Boundaries of the centrality effect during product choice," Journal of Retailing and Consumer Services, Elsevier, vol. 32(C), pages 32-38.
    9. Jorge Vieira da Costa Jr & Alfredo Sarlo Neto & Andrea Bispo da Silva, 2016. "Balance sheet classification of compound financial instruments and the judgment of securities market analysts," Journal of Economic and Financial Studies (JEFS), LAR Center Press, vol. 4(5), pages 37-54, October.
    10. Bischof, Jannis & Ebert, Michael, 2007. "IAS 39 and biases in the risk perception of financial instruments," Papers 07-73, Sonderforschungsbreich 504.
    11. 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.
    12. Odette M. Pinto, 2015. "Effects of Advice on Effectiveness and Efficiency of Tax Planning Tasks," Accounting Perspectives, John Wiley & Sons, vol. 14(4), pages 307-329, December.
    13. Atul Shah, 1998. "Exploring the influences and constraints on creative accounting in the United Kingdom," European Accounting Review, Taylor & Francis Journals, vol. 7(1), pages 83-104.
    14. Vollmer, Hendrik, 2016. "Financial numbers as signs and signals: Looking back and moving forward," economic sociology. perspectives and conversations, Max Planck Institute for the Study of Societies, vol. 17(2), pages 32-38.
    15. Bischof, Jannis & Ebert, Michael, 2007. "Inconsistent measurement and disclosure of non-contingent financial derivatives under IFRS : a behavioral perspective," Papers 07-02, Sonderforschungsbreich 504.
    16. David Hirshleifer & Sonya S. Lim & Siew Hong Teoh, 2011. "Limited Investor Attention and Stock Market Misreactions to Accounting Information," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 1(1), pages 35-73.
    17. Hasseldine, John & Morris, Gregory, 2013. "Corporate social responsibility and tax avoidance: A comment and reflection," Accounting forum, Elsevier, vol. 37(1), pages 1-14.
    18. Jeffrey D. Gramlich & William J. Mayew & Mary Lea McAnally, 2006. "Debt Reclassification and Capital Market Consequences," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(7‐8), pages 1189-1212, September.
    19. Karen Benson & Martina K. Linnenluecke & David Morrison & Sviatoslav Rosov, 2020. "Death spiral PIPEs: a reconsideration of the evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 4175-4194, December.
    20. Liu, Chengcheng & Li, Qing & Lin, Yu-En, 2023. "Corporate transparency and firm value: Does market competition play an external governance role?," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(1).

    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:bla:joares:v:54:y:2016:i:5:p:1267-1296. 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: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0021-8456 .

    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.