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

Shi Levi
University of California Berkeley

Benjamin Segal
INSEAD

Abstract: We test the influence of securities’ classification into liabilities and equity on firms’ financing choices. Examining the recent change in reporting classification of hybrid securities as a result of SFAS 150, we find this regime change has affected firms’ decision to issue mandatorily redeemable preferred shares (MRPS). Following the requirement to classify the debt-like hybrid security MRPS as a liability, the share of MRPS issuances in firms’ new financing pie has declined. Characteristics of firms issuing MRPS have also changed. While prior to SFAS 150, firms with higher levels of debt chose to issue MRPS and not debt, after the adoption of the standard, the decision to issue MRPS is no longer related to firms’ pre-existing debt levels. The results indicate that non-debt classification of debt-like hybrid securities drives managers to use these securities, and suggest that the requirement to classify them as a liability will sever the reporting incentive from the issuance decision

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