Balance Sheet Management: The Case of Short‐Term Obligations Reclassified as Long‐Term Debt

Jeffrey D. Gramlich, Mary Lea McAnally and Jacob Thomas

Journal of Accounting Research, 2001, vol. 39, issue 2, 283-295

Abstract: We investigate potential management of balance sheet ratios by a sample of firms that reclassify short‐term obligations to long‐term debt and subsequently declassify that debt (return it to the current liability section). Although aggregate measures of liabilities and equity remain unchanged when firms reclassify (declassify), the practice does increase (decrease) reported measures of liquidity, such as the current ratio, and long‐term leverage. Our results suggest that firms reclassify and declassify to smooth reported liquidity and leverage, relative to the prior year and to industry benchmarks. Our evidence is also consistent with firms working around restrictive debt covenants.

Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:bla:joares:v:39:y:2001:i:2:p:283-295

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Journal of Accounting Research is currently edited by Philip G. Berger, Luzi Hail, Christian Leuz, Haresh Sapra, Douglas J. Skinner, Rodrigo Verdi and Regina Wittenberg Moerman

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