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
Date Written: January 28, 2021
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: Suggested Citation