An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

William D. Terando
Iowa State University

Wayne H. Shaw
Southern Methodist University

David B. Smith
University of Nebraska at Lincoln

Abstract: This paper examines whether firm choice and investor valuation of cash and share put warrants are influenced by their differential effect on firm solvency. We provide evidence in support of the efficient contracting motivation by showing that firms choose put settlement terms based on their differential effect on firm solvency rather than accounting considerations. We also show that solvency considerations influence the market’s valuation of cash and share-put warrant obligations. Our results add to existing capital structure literature by suggesting that dual purpose financing instruments, such as cash and share-puts, be reported separately on a firm’s balance sheet. We also contribute to the body of literature on financial statement management by showing that firms choose put settlement terms based on economic (solvency) considerations most favorable to the firm’s situation and then seek accounting disclosures that are consistent with the economics of the transaction.

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