Financial instruments with characteristics of equity: outcomes and value relevance

Abstract

Purpose

This study aims to investigate the motivations behind the issuance of financial instruments with characteristics of equity (FICE), economic consequences associated with their issuance and accounting classifications based on a value-relevance approach.

Design/methodology/approach

Using a sample of 169 financial and nonfinancial firms from 10 jurisdictions that adopted International Financial Reporting Standards, the authors use a difference-in-differences econometric approach.

Findings

The findings reveal that FICE issuers are more leveraged companies with higher costs of equity and, in some cases, lower effective tax rates. This evidence corroborates the hypothesis that issuers of FICEs seek to increase their book values of equity (accounting treatment as equity) and, simultaneously, generate deductible expenses for tax purposes (tax treatment as liability).

Practical implications

This finding suggests that market participants do not treat these instruments as regular equity but rather as quasi-equity. The findings suggest that a binary classification of FICE as debt or equity may not be the accounting treatment that best represents the underlying economic substance of these contracts. Furthermore, this study reinforces the IASB indication regarding to increase the FICE disclosure to allow stakeholders to better understand the economic essence of these bonds.

Originality/value

This study assesses the economic outcomes and market evaluation of a specific type of FICE that has not been previously studied, which is similar to the examples provided by the IASB in their materials on the subject.

Citation

Flores, E. and Fasan, M. (2024), "Financial instruments with characteristics of equity: outcomes and value relevance", Journal of Financial Reporting and Accounting, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFRA-01-2024-0044