Transaction Structuring and Canadian Convertible Debt

53 Pages Posted: 29 May 2008 Last revised: 27 Jan 2013

See all articles by Thomas W. Scott

Thomas W. Scott

Independent

Christine I. Wiedman

University of Waterloo

Heather A. Wier

University of Alberta - Department of Accounting, Operations & Information Systems

Date Written: June 21, 2010

Abstract

We examine whether Canadian firms issuing convertible debt over the period 1996–2003 structured issuances to minimize reported leverage. Over this sample period, some firms using payment-in-kind (PIK) provisions providing them with the option to make interest and/or principal payments in company shares were able to record significant amounts of the issuance as equity. In a sample of 195 convertible debt offerings, we find significant variation in accounting treatment, ranging from firms recording the entire issuance as debt to some recording the entire issuance as equity. We find evidence consistent with the contention that reporting benefits are an important reason why high-leverage corporations with material convertible debt transactions used PIK provisions. In contrast, our evidence suggests that the future financial flexibility ensuing from the use of PIK provisions was an important determinant of income trusts’ use of this feature. We acknowledge, however, that during our sample period PIK provisions simultaneously provide both financial flexibility and reporting benefits to any issuer, whether corporation or trust. Finally, we document a negative share price reaction on the part of convertible debt issuers employing PIK provisions at the time when the likelihood of the introduction of more restrictive accounting rules increased. This negative reaction is driven by the corporations in our sample, with the income trusts largely unaffected. Our findings are relevant to standard setters as they debate alternative models for distinguishing between equity and liabilities.

Keywords: Convertible debt, transaction structuring, liabilities and equity, aggressive reporting

JEL Classification: G12, G32, M41, M43, M44, M52

Suggested Citation

Scott, Thomas W. and Wiedman, Christine I. and Wier, Heather A., Transaction Structuring and Canadian Convertible Debt (June 21, 2010). CAAA Annual Conference 2009 Paper, Available at SSRN: https://ssrn.com/abstract=1138683 or http://dx.doi.org/10.2139/ssrn.1138683

Thomas W. Scott

Independent

Heather A. Wier

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-3053 (Phone)
780-420-3325 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
135
Abstract Views
1,775
rank
270,403
PlumX Metrics