The Market Perception of Convertible Debt Versus Straight Debt: some Empirical Evidence from U.S. Firms and Non‐U.S. Firms Listed in the U.S.

Abstract

Accounting for convertible debt has long been a source of controversy in the accounting profession in the U.S. Current U.S. accounting rules require classifying convertible debt at date of issuance as “entirely debt” until conversion, despite numerous studies that assert that convertible debt is not “entirely debt”, but is a blend of debt and equity. Convertible debt has taken on international interest because of the issuance of International Accounting Standard (IAS) 32, Financial Instruments; Disclosure and Presentation, which prescribes reporting separate debt and equity components for convertible debt. This study examines convertible debt issued by U.S. firms and non‐U.S. firms listed in the U.S. using a levels approach. Specifically, convertible debt is compared to straight debt and contrary to ex ante expectation, convertible debt was not found to be perceived as being significantly different than straight debt for U.S. firms for any years and is statistically different in only two of the six years tested for non‐U.S. firms. The validity of this study's findings is underscored by its research design, which compares convertible debt and straight debt issued by the same firms. The findings suggest that investors regard reported amounts of convertible debt similar to straight debt in their assessment of firm value.

Relative Value Relevance of Alternative Accounting Treatments for Unrealized Gains: Implications for the IASB

“…16. As in prior research (see, e.g., Jennings et al, 1996;Schneider et al, 1999), where companies had preference (preferred) shares in their capital structure, the liquidation value of the shares was added to liabilities to obtain book value of liabilities.…”