Debt Reclassification and Capital Market Consequences

24 Pages Posted: 3 Oct 2006

See all articles by Mary Lea McAnally

Mary Lea McAnally

Texas A&M University - Department of Accounting

Jeffrey Gramlich

Carson College of Business

William J. Mayew

Duke University - Fuqua School of Business

Abstract

We provide initial evidence on the economic consequences of a relatively large, fully disclosed, and apparently purposeful reporting decision: the balance sheet classification of short-term obligations as long-term debt in accordance with Statement of Financial Accounting Standard No. 6. We examine a sample of 1,684 American firm-year observations between the years 1989 and 2000 to determine whether reclassification is associated with debt-ratings and equity values. We find that reclassification increases the likelihood of a subsequent debt-rating downgrade. We also find that market value decreases with increases in the amount reclassified, and that equity value is higher after firms cease reclassifying short-term obligations as long-term debt, compared with other firm-years in the sample. Thus, changes in debt classification are empirically linked in predictable directions to subsequent changes in debt ratings and stock values. Taken together, our results show that debt classification is an important publicly-available indicator that may be useful to capital market participants. We discuss several research extensions including the implications of our findings to European companies that convert to IAS in 2005.

JEL Classification: M41, M44, G12, G33

Suggested Citation

McAnally, Mary Lea and Gramlich, Jeffrey and Mayew, William J., Debt Reclassification and Capital Market Consequences. Journal of Business Finance & Accounting, Vol. 33, No. 7-8, pp. 1189-1212, September/October 2006. Available at SSRN: https://ssrn.com/abstract=934609 or http://dx.doi.org/10.1111/j.1468-5957.2006.00593.x

Mary Lea McAnally (Contact Author)

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States
979-845-5017 (Phone)
979-845-0014 (Fax)

Jeffrey Gramlich

Carson College of Business ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

HOME PAGE: http://https://business.wsu.edu/research-faculty/institutes/hoops-institute/

William J. Mayew

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7781 (Phone)
919-660-7971 (Fax)

HOME PAGE: http://www.fuqua.duke.edu/faculty/alpha/mayew.htm

Register to save articles to
your library

Register

Paper statistics

Downloads
19
Abstract Views
1,757
PlumX Metrics