Category Archives: Accounting

Convertible Bonds: How Much Equity, How Much Debt?

Arak, Marcelle, and Martin, L. Ann
Financial Analysts Journal Vol. 61, Issue 2, p. 44-50

Financial analysts need accurate estimates of debt, equity, leverage, and EPS. The method proposed here, based on the probability of conversion, yields new estimates of the debt and equity in a convertible bond issue. When this method is used, the value of the equity component in a hypothetical issue is found to be substantial–larger than the value of the options and clearly larger than zero, which is assigned under current accounting rules. The estimate of the debt component is smaller than recorded under current accounting rules. Thus, the leverage of convertible bond issuers is substantially lower when this method is used.

Debiasing Balanced Scorecard Evaluations

Roberts, Michael L., Albright, Thomas L. and Hibbets, Aleecia R.
Behavioral Research in Accounting, Vol. 16, Issue 1, p. 75-88

Lipe and Salterio (2000) found that superiors disregarded half of the information when using a Balanced Scorecard to evaluate the performance of two divisional managers. Only common measures affected the superiors’ holistic evaluations, defeating the purpose of the Balanced Scorecard. Our study examines whether disaggregating the Balanced Scorecard results in evaluations consistent with the intent of the Balanced Scorecard approach. Results indicate the disaggregated strategy allows superiors to utilize unique as well as common measures, thus overcoming the common-measures bias. In addition, we find Balanced Scorecard performance evaluations explain more than half the variation in subsequent compensation decisions.