Economic Consequences of Recognizing Off-Balance Sheet Activities*

46 Pages Posted: 11 Sep 2008 Last revised: 11 Feb 2009

See all articles by Jenny Li Zhang

Jenny Li Zhang

University of British Columbia - Sauder School of Business

Date Written: September 11, 2008


This study investigates the economic impact of FASB Interpretation No. 46, Consolidation of Variable Interest Entities (VIEs) - an Interpretation of ARB No. 51 (FIN 46). FIN 46 requires firms to consolidate VIEs, often referred to as special purpose entities (SPEs), if certain criteria are met. I find that the adoption of FIN 46 is associated with both a decline in the use of VIEs and an effort by firms to decrease book leverage by substituting conventional debt with equity. This evidence indicates that the new rule affects firms' capital structure decisions. Moreover, I demonstrate that Standard & Poor's credit ratings for VIE firms have significantly worsened since the adoption of FIN 46. The change in credit rating indicates that FIN 46 conveys new information that was not previously incorporated into credit ratings. I also find that the pricing of information risk decreased for non-VIE firms, but not for the VIE firms. Taken together, the evidence is consistent with the stated goal of FIN 46, which is to enhance the representational faithfulness of financial statements in circumstances where the risk and benefits of ownership are retained.

Keywords: SPEs, VIEs, FIN 46, economic consequeces, capital structure, cost of capital

JEL Classification: M41, M44, G32, G33, G38

Suggested Citation

Zhang, Jenny Li, Economic Consequences of Recognizing Off-Balance Sheet Activities* (September 11, 2008). AAA 2009 Financial Accounting and Reporting Section (FARS) Paper. Available at SSRN: or

Jenny Li Zhang (Contact Author)

University of British Columbia - Sauder School of Business ( email )

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Vancouver, BC V6T 1Z2

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