Management Reaction to Mandatory Accounting Changes: The Canadian Preferred Shares Case

30 Pages Posted: 18 Oct 1998

Date Written: September 28, 1998

Abstract

The new Canadian accounting standards for financial instruments require that retractable preferred shares be classified as debt, thus negatively affecting the debt/equity ratio. Previous research, most of which has examined the impact of a change in American accounting standards affecting the determination of earnings, indicates that firms with such shares will act to mitigate the negative impact of the accounting change on their financial statements. Specifically, firms are likely to: a) reduce the amount of retractable preferred shares outstanding, and/or b) reduce the amount of other liabilities, and/or c) increase the amount of equity outstanding.

I test these predictions using data on firms required to file information on their preferred shares with Canadian securities commissions. Evidence based on a sample of 34 such firms indicates that they did indeed reduce the amounts of both retractable preferred shares and the amounts of other liabilities and issued additional common shares. Surprisingly, smaller firms did not make greater reductions (as a proportion of total assets) than larger firms.

JEL Classification: M41, G32

Suggested Citation

Murdoch, Alastair, Management Reaction to Mandatory Accounting Changes: The Canadian Preferred Shares Case (September 28, 1998). Available at SSRN: https://ssrn.com/abstract=133128 or http://dx.doi.org/10.2139/ssrn.133128

Alastair Murdoch (Contact Author)

affiliation not provided to SSRN

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
227
Abstract Views
2,023
rank
144,494
PlumX Metrics