Journal Articles

The Credibility of Classifying Hybrid Securities as Liabilities or Equity

2006, Accounting, Organizations, & Society

F. Hodge, Patrick E. Hopkins, J. Pratt

Abstract

In this study we investigate how the level of discretion in the reporting environment and management’s reporting reputation influence the extent to which management’s reporting incentives are important in determining the perceived credibility of management’s classification choices. Consistent with prior research, we show that users view incentive-inconsistent classifications as more credible than incentive-consistent classifications. We extend this finding by showing that the strength of this relationship (i.e., the extent to which users consider the consistency between the classification and management’s reporting incentives) depends on the level of discretion in the reporting environment and management’s reporting reputation. We find that users rely less (more) on the consistency between management’s reporting incentives and the classification in a mandated (discretionary) reporting environment and when managers have a good (poor) reporting reputation. We conclude by discussing the implications of our findings and potential future research.

Citation

Hodge, F., P. Hopkins, and J. Pratt (2006), “The Credibility of Classifying Hybrid Securities as Liabilities or Equity,” Accounting Organizations and Society, October, pp. 623-634.