The Economic Consequences of IFRS: The Vanishing of Preference Shares in the Netherlands

The consequences of international accounting standards are likely to reach beyond the

impact on financial statements. This paper demonstrates one of the economic

implications of international standards. We focus on the impact of the IFRS regulation on

preference shares (IAS 32) in the Netherlands. IAS 32 causes most preference shares to

lose their classification as equity and these shares will hence be classified as liabilities.

We document that for Dutch firms with preferred stock outstanding, the reclassification

will on average increase the reported debt ratio by 35%. We find that 71% of the firms

that are affected by IAS 32 buy back their preference shares or alter the specifications of

the preference shares in such a way that the classification as equity can be maintained.

We conclude that IFRS does not only lead to a decrease in the use of financial

instruments that otherwise would have added to the capital structure diversity, but also

changes firms real capital structure. We further conclude that the main determinant of

the decision whether to buy back preference shares is the magnitude of the impact of IAS

32 on a firms debt ratio. Available downloads

www.eur.nl/fbk/dep/dep5/seminars For more information contact Peter Roosenboom; proosenboom@rsm.nl