Does Balance Sheet Classification Matter? Evidence from Trust Preferred Stock
Mustang Journal of Accounting and Finance, Forthcoming
Posted: 20 Oct 2013
There are 2 versions of this paper
Does Balance Sheet Classification Matter? Evidence from Trust Preferred Stock
Date Written: 2013
Abstract
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) continue to debate the accounting for financial instruments and the distinction between liabilities and equity. Academic research has attempted to inform the debate by examining market value implications of balance sheet classification. If balance sheet categorization influences decision makers, then regulators may wish to proceed with caution in re-defining rules delineating the line between debt and equity.
In 2003 the FASB required mandatorily redeemable financial instruments to be re-classified from the mezzanine to the liability section of the balance sheet. We examine whether the balance sheet location of trust preferred stock (TPS), a mandatorily redeemable financial instrument, affects its market valuation. Using a sample of 105 firm-year observations from 2001-2004, we are unable to detect differential market valuation of TPS based on its balance sheet location. Our results indicate that certain laboratory findings [i.e. Hopkins (1996)] may not generalize to market prices.
Future research along two lines may be fruitful. First, experimental market research may reveal more nuanced predictions about how financial statement categorization impacts decision makers. Second, as data bases such as Compustat add items on specific financial instruments, archival studies on larger samples may be revealing.
Keywords: Balance Sheet Classification
Suggested Citation: Suggested Citation