Does Mandatory Recognition of Off-Balance-Sheet Items Affect Capital Structure Choice?

• In Event: Research with an Impact on Scholarship: Recognition, Valuation and Market Timing

Abstract

We investigate whether mandatory recognition of previously disclosed off-balance sheet items affects corporate capital structure decisions. Specifically, we use the introduction of the Statement of Financial Accounting Standard 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 plan funding explicitly on the balance sheet. While leverage decreases following the regulation, we show that this change is not driven by active managerial leverage reductions. Our findings suggest that the mandatory recognition was not costly to DB plan sponsors and revealed no new information to lenders and shareholders.

Authors

• Michael Axenrod, Norwegian School of Economics

• Michael Kisser, BI Norwegian Business School