Research & Publications
The Effect of Financial Statement Classification of Hybrid Financial Instruments On Financial Analysts’ Stock Price Judgments
1996, Journal of Accounting Research
Patrick E. Hopkins
Whether the balance sheet classification of financial instruments that include attributes of both debt and equity affects the stock price judgments of buy-side financial analysts is investigated. Firms announcing an offering of additional common equity securities experience a decline in the market value of their outstanding common stock. In contrast, firms financing with straight debt generally do not experience a decline in common stock market value. The results of an experiment in which buy-side financial analysts estimate the price of a company's publicly traded common stock immediately after the announcement of a new offering of mandatory redeemable preferred stock are reported. The results indicate that differential accounting classification affects the stock price judgments of financial analysts. The previously documented valuation effects of financing with straight debt and additional common equity securities were replicated in a laboratory setting. The observed differences between conditions appear to be caused by analysts using their prior knowledge of the valuation difference between straight debt and additional common equity financing.
Hopkins, P. E. (1996), “The Effect of Financial Statement Classification of Hybrid Financial Instruments On Financial Analysts’ Stock Price Judgments,” Journal of Accounting Research, Supplement, pp. 33-50.