Financial Instruments with Characteristics of Equity Determinants and Consequences

Posted: 29 May 2017 Last revised: 22 Jun 2018

See all articles by Eduardo Flores

Eduardo Flores

University of São Paulo - School of Economics, Business and Accounting

Alexsandro Broedel Lopes

Universidade de São Paulo; Manchester Business School

Nelson Carvalho

FEA-USP

Marco Fasan

Ca Foscari University of Venice - Department of Management

Date Written: May 28, 2017

Abstract

The purpose of this study was to evaluate the effects of hybrid financial instruments in market-based accounting research. Thus, value relevance and timeliness models were used to determine how the accounting figures are assimilated by stock prices and returns (Ohlson, 1995; Aboody et al., 1999; Lopes & Walker, 2012). Additionally, the relationships between these bonds and the cost of capital, financial leverage, and the effective tax rate were observed, all of which are crucial to this fundraising tool (Lee & Figlewicz, 1999). The methodological approach was composed of two samples: (1) the interest group, formed by 39 companies that issued hybrid instruments in 10 different jurisdictions; and (2) the control group, comprised of 107 organizations domiciled in the same jurisdictions and having a similar equity composition to the interest group. The observations, collected quarterly from December 2005 to December 2015, totaled 3,386. The findings indicated that the hybrid financial instruments affected the stock prices and returns of the issuers in a positive and statistically significant way, much like other equity elements (e.g., book value per share and earnings per share). Concerning the determinant factors for the issuance of these bonds, it was found that the issuers had a higher cost of capital, more financial leverage, and a lower effective tax rate than the non-issuers. Therefore, it can be concluded that, while new forms of contracts for obtaining resources, such as hybrid financial instruments, are relevant for the financing of business activities, it is essential that accounting models faithfully represent the economic nature of these instruments in order to prevent biases from occurring among the users of financial statements.

Keywords: Hybrid Financial Instruments; Equity or Debt; MBAR Effects; Financial Leverage; Cost of Capital; Effective Tax Rates

JEL Classification: O16; F38; M41; K22; G15; G23; G32

Suggested Citation

Flores, Eduardo and Broedel Lopes, Alexsandro and Carvalho, Nelson and Fasan, Marco, Financial Instruments with Characteristics of Equity Determinants and Consequences (May 28, 2017). Available at SSRN: https://ssrn.com/abstract=2976331 or http://dx.doi.org/10.2139/ssrn.2976331

Eduardo Flores (Contact Author)

University of São Paulo - School of Economics, Business and Accounting ( email )

Rua Luciano Gualberto, 315
São Paulo, São Paulo 14800-901
Brazil

Alexsandro Broedel Lopes

Universidade de São Paulo ( email )

Av. Prof. Luciano Gualberto 908
São Paulo, 05508-900
Brazil
+55 11 3091 5820 (Phone)
+55 11 3813 0120 (Fax)

Manchester Business School

Booth Street West
Manchester, M15 6PB
United Kingdom

Nelson Carvalho

FEA-USP ( email )

Av. Prof. Luciano Gualberto 908
São Paulo SP, São Paulo 05508-900
Brazil

Marco Fasan

Ca Foscari University of Venice - Department of Management ( email )

San Giobbe, Cannaregio 873
Venice, 30121
Italy

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