Hybrid Financial Instruments, Cost of Capital and Regulatory Arbitrage - an Empirical Investigation

Journal of Applied Research in Accounting and Finance (JARAF), Vol. 1, No. 1, p. 43, 2006

17 Pages Posted: 9 Nov 2006  

Tyrone M. Carlin

The University of Sydney Business School

Nigel Finch

Saki Partners

Guy Ford

Macquarie University - Graduate School of Management

Abstract

Data recently published by the Reserve Bank of Australia clearly demonstrates that after a period in abeyance, hybrid financial instruments have again become popular tools for capital raising and management. This raises several questions of practical and theoretical significance, particularly in relation to the motivation for adopting hybrid instruments as an element of firm capital structure, and the impact of putting this choice into effect. In this paper, we examine two key themes. First, we analyse the extent to which the rise of hybrid instruments can be justified on the grounds that the use of these instruments can result in lower firm cost of capital. We also investigate the impact on firm financial reports and key metrics of financial performance of risk which result from the deployment of hybrid financial instruments as components of firm capital structure. We conclude by expressing scepticism as to the proposition that the use of hybrid instruments systematically lowers issuer cost of capital, and argue that the use of hybrid instruments has caused material distortions to emerge within the financial statements of firms which employ them.

Keywords: Hybrid Securities, Financial Reporting, Creative Accounting, Regulatory Arbitrage

JEL Classification: M30, G32

Suggested Citation

Carlin, Tyrone M. and Finch, Nigel and Ford, Guy, Hybrid Financial Instruments, Cost of Capital and Regulatory Arbitrage - an Empirical Investigation. Available at SSRN: https://ssrn.com/abstract=943325

Tyrone M. Carlin (Contact Author)

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia
+ 61 2 9036 7230 (Phone)
+61 2 9351 7471 (Fax)

HOME PAGE: http://sydney.edu.au/business/staff/tyronec

Nigel Finch

Saki Partners ( email )

Australia

Guy Ford

Macquarie University - Graduate School of Management ( email )

99 Talavera Road
Sydney, NSW 2113
Australia
+61-2-9850-7813 (Phone)
+61-2-9850-9019 (Fax)

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