Firms' Off-Balance Sheet Financing: Evidence from Their Book-Tax Reporting Differences

35 Pages Posted: 6 Feb 2004

See all articles by Lillian F. Mills

Lillian F. Mills

University of Texas at Austin - McCombs School of Business

Kaye J. Newberry

University of Arizona - Department of Accounting

Date Written: January 5, 2004

Abstract

We examine large U.S. corporations' off-balance sheet financing over the period 1989-2001. We construct firm-level proxies of off-balance sheet debt by comparing firms' tax return vs. financial statement reporting for interest expense and debt. Our results indicate that firms' financial reporting motives significantly influence their use of off-balance sheet debt. In particular, firms report greater amounts of interest on their tax return than to shareholders and creditors when their S&P bond ratings are less favorable, they have higher existing book leverage, or they have a greater proportion of debt that must be renegotiated in the short term. These results suggest that firms with greater credit risks are more likely to use substantive off-balance sheet debt. In supplemental tests, we find some evidence that these financial reporting effects occurred primarily during 1994-1999. We also find within-firm effects that suggest changes in firms' reporting incentives impact their use of off-balance sheet debt.

Keywords: Off-balance sheet financing, book-tax difference, capital structure

JEL Classification: M41, M43, G32

Suggested Citation

Mills, Lillian F. and Newberry, Kaye J., Firms' Off-Balance Sheet Financing: Evidence from Their Book-Tax Reporting Differences (January 5, 2004). Available at SSRN: https://ssrn.com/abstract=494743 or http://dx.doi.org/10.2139/ssrn.494743

Lillian F. Mills (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Kaye J. Newberry

University of Arizona - Department of Accounting ( email )

Tucson, AZ 85721
United States
520-621-1252 (Phone)
520-621-3742 (Fax)

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