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Review of Law & Economics

Editor-in-Chief: Parisi, Francesco

Ed. by Cooter, Robert D. / Gómez Pomar, Fernando / Kornhauser, Lewis A. / Parchomovsky, Gideon / Engel, Christoph

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CiteScore 2017: 0.30

SCImago Journal Rank (SJR) 2017: 0.195
Source Normalized Impact per Paper (SNIP) 2017: 0.410

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1555-5879
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Volume 12, Issue 1

Issues

How Accurately Can Convertibles be Classified as Debt or Equity for Tax Purposes? Evidence from Australia

Jean-Pierre Fenech / Victor Fang / Rob Brown
Published Online: 2016-01-23 | DOI: https://doi.org/10.1515/rle-2014-0028

Abstract

The New Business Tax System (Debt and Equity) Act established a set of criteria by which convertible securities could be classified as “debt-like” or “equity-like” for tax purposes. Using data on 256 convertible issues made in Australia between 2001 and 2012, we show that there is a strong relation between, on the one hand, a convertible’s ex ante classification determined at issuance using the tax criteria and, on the other hand, its ex post classification based on the conversion premium at maturity. We conclude that the criteria have been an efficient means of classifying convertibles. We also find an industry effect where debt-like convertibles are more likely to be associated with the resources, metals and mining firms, whilst equity-like are mainly issued by the finance sector. This finding is consistent with the solution to a finance-sequencing problem in the former case, and the impact of capital adequacy regulation in the latter.

Keywords: tax classification; convertible securities; misclassification

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About the article

Published Online: 2016-01-23

Published in Print: 2016-03-01


Citation Information: Review of Law & Economics, Volume 12, Issue 1, Pages 153–164, ISSN (Online) 1555-5879, ISSN (Print) 2194-6000, DOI: https://doi.org/10.1515/rle-2014-0028.

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