How Do Experienced Users Evaluate Hybrid Financial Instruments?

44 Pages Posted: 22 Jan 2015 Last revised: 19 May 2016

Shana Clor-Proell

Texas Christian University - Department of Accounting

Lisa Koonce

University of Texas

Brian J. White

University of Texas at Austin - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: May 11, 2016

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.

Keywords: hybrid financial instruments; accounting classification; disclosure

Suggested Citation

Clor-Proell, Shana and Koonce, Lisa and White, Brian J., How Do Experienced Users Evaluate Hybrid Financial Instruments? (May 11, 2016). Available at SSRN: https://ssrn.com/abstract=2552779 or http://dx.doi.org/10.2139/ssrn.2552779

Shana Clor-Proell

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States

Lisa L. Koonce (Contact Author)

University of Texas ( email )

Dept. of Accounting
McCombs School of Business
Austin, TX 78712
United States
512-471-5576 (Phone)
512-471-3904 (Fax)

Brian J. White

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States

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