Does Mandatory Recognition of Off-Balance Sheet Liabilities Affect Capital Structure Choice? Evidence from SFAS 158

Abstract

Statement of Financial Accounting Standards (SFAS) No. 158 changes the accounting for sponsors of defined benefit (DB) retirement plans and mandates recognition of previously disclosed off-balance sheet items on the financial statements. On average, the mandatory recognition adds economically significant liabilities to corporate balance sheets, with substantial variation across DB plan sponsors. The paper shows that plan sponsors reduce financial leverage in response to SFAS 158 when creditors retain control rights. Additional evidence suggests that the allocation of creditor control rights also mitigates the debt overhang problem that arises in connection with the mandatory recognition of previous off-balance sheet liabilities.

Keywords: capital structure; covenants; off-balance sheet liabilities; leverage; defined benefit pension plan; pension accounting; SFAS 158; recognition; disclosure

JEL Classification: G32, G39, M40, M41, M48