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; email@example.com