Economic Consequences of Financial Reporting Changes: Diluted EPS and Contingent Convertible Securities

Posted: 16 Nov 2006  

Carol A. Marquardt

City University of New York (CUNY) – Baruch College

Christine I. Wiedman

University of Waterloo

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Abstract

This paper examines the economic consequences of changes in the financial reporting requirements for contingent convertible securities (COCOs). Using a sample of 199 COCOs from 2000-2004, we find that issuers are more likely to restructure or redeem existing COCOs to obtain more favorable accounting treatment when the financial reporting impact on diluted earnings per share (EPS) is greater and when EPS is used as a performance metric in CEO bonus contracts. These results provide new evidence that managers are willing to incur costs to retain perceived financial reporting and compensation benefits. We also present evidence of significantly negative stock returns around event dates associated with the financial reporting changes, consistent with investor anticipation of the agency costs associated with the rule change.

Keywords: Economic consequences, agency costs, diluted EPS, executive compensation, convertible securities

JEL Classification: M41, M45, J33, G12, G38

Suggested Citation

Marquardt, Carol A. and Wiedman, Christine I., Economic Consequences of Financial Reporting Changes: Diluted EPS and Contingent Convertible Securities. Review of Accounting Studies, Vol. 12, No. 4, December 2007. Available at SSRN: https://ssrn.com/abstract=944576

Carol Marquardt (Contact Author)

City University of New York (CUNY) – Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3241 (Phone)

Christine I. Wiedman

University of Waterloo ( email )

Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x.3732 (Phone)
519-888-7562 (Fax)

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