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

43 Pages Posted: 23 Feb 2019 Last revised: 12 Feb 2021

See all articles by Michael Axenrod

Michael Axenrod

NHH - Norwegian School of Economics

Michael Kisser

BI Norwegian Business School

Date Written: January 28, 2021

Abstract

We investigate whether mandatory recognition of previously disclosed off-balance sheet liabilities affects corporate capital structure decisions. Specifically, we use the introduction of the Statement of Financial Accounting Standards No. 158 as a quasi-exogenous shock to financial reporting decisions as it requires sponsors of defined benefit (DB) pension plans to recognize the level of pension and healthcare plan funding explicitly on the balance sheet. Our findings show that underfunded DB plan sponsors decrease financial leverage following the new accounting standard. Importantly, this result obtains for subsamples of underfunded plan sponsors with tight financial covenants, those with unrated debt or with low analyst coverage. The results suggest that the mandatory financial statement recognition was sufficiently costly to warrant a change in corporate funding decisions.

Keywords: SFAS 158, Off-Balance-Sheet Items, Defined Benefit Pension Plan, Leverage, Recognition, Disclosure, Pension Accounting, Capital Structure

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

Suggested Citation

Axenrod, Michael and Kisser, Michael, Does Mandatory Recognition of Off-Balance Sheet Liabilities Affect Capital Structure Choice? Evidence from SFAS 158 (January 28, 2021). Available at SSRN: https://ssrn.com/abstract=3331061 or http://dx.doi.org/10.2139/ssrn.3331061

Michael Axenrod

NHH - Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway

Michael Kisser (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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