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How Accurately Can Convertibles be Classified as Debt or Equity for Tax Purposes? Evidence from Australia

Author

Listed:
  • Fenech Jean-Pierre

    (Department of Banking and Finance, Monash University, Caulfield East, Vic 3145, Australia)

  • Fang Victor

    (School of Accounting Economics and Finance, Deakin University, Burwood, Vic 3125, Australia)

  • Brown Rob

    (Department of Finance, Melbourne University, Parkville, Vic 3010, Australia)

Abstract

The New Business Tax System (Debt and Equity) Act established a set of criteria by which convertible securities could be classified as “debt-like” or “equity-like” for tax purposes. Using data on 256 convertible issues made in Australia between 2001 and 2012, we show that there is a strong relation between, on the one hand, a convertible’s ex ante classification determined at issuance using the tax criteria and, on the other hand, its ex post classification based on the conversion premium at maturity. We conclude that the criteria have been an efficient means of classifying convertibles. We also find an industry effect where debt-like convertibles are more likely to be associated with the resources, metals and mining firms, whilst equity-like are mainly issued by the finance sector. This finding is consistent with the solution to a finance-sequencing problem in the former case, and the impact of capital adequacy regulation in the latter.

Suggested Citation

  • Fenech Jean-Pierre & Fang Victor & Brown Rob, 2016. "How Accurately Can Convertibles be Classified as Debt or Equity for Tax Purposes? Evidence from Australia," Review of Law & Economics, De Gruyter, vol. 12(1), pages 153-164, March.
    • Handle: RePEc:bpj:rlecon:v:12:y:2016:i:1:p:153-164:n:6
    DOI: 10.1515/rle-2014-0028
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    References listed on IDEAS

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    1. Mr. Scott Roger & Mr. Jan Vlcek, 2011. "Macroeconomic Costs of Higher Bank Capital and Liquidity Requirements," IMF Working Papers 2011/103, International Monetary Fund.
    2. Suchard, Jo-Ann & Singh, Manohar, 2006. "The determinants of the hybrid security issuance decision for Australian firms," Pacific-Basin Finance Journal, Elsevier, vol. 14(3), pages 269-290, June.
    3. Sarkar, Sudipto, 2003. "Early and late calls of convertible bonds: Theory and evidence," Journal of Banking & Finance, Elsevier, vol. 27(7), pages 1349-1374, July.
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    Cited by:

    1. Hebattallah Aboulmaaty & Pascal Barneto & Joël Keiser & Stéphane Ouvrard & Yves Rannou, 2018. "Titres hybrides et référentiels comptables : une comparaison internationale," Post-Print hal-01907960, HAL.

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