Debt reclassification and capital market consequences Academic Article uri icon

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 shortterm obligations as longterm debt in accordance with Statement of Financial Accounting Standard No. 6. We examine a sample of 1,684 American firmyear observations between the years 1989 and 2000 to determine whether reclassification is associated with debtratings and equity values. We find that reclassification increases the likelihood of a subsequent debtrating downgrade. We also find that market value decreases with increases in the amount reclassified, and that equity value is higher after firms cease reclassifying shortterm obligations as longterm debt, compared with other firmyears 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 publiclyavailable 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.

published proceedings

  • Journal of Business Finance & Accounting

author list (cited authors)

  • Gramlich, J. D., Mayew, W. J., & McAnally, M. L.

citation count

  • 10

publication date

  • January 2006