Does Mandatory Recognition of Off-Balance Sheet Liabilities Affect Capital Structure Choice? Evidence from SFAS 158

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 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 DB plan sponsors did not actively decrease financial leverage following the new accounting standard. This also obtains for subsamples of plan sponsors with tight or violated financial covenants or plan sponsors with unrated debt or low analyst following. The results suggest that the mandatory recognition did not involve sufficient costs to warrant a change in corporate funding decisions.