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

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  • Jeffrey D. Gramlich
  • Mary Lea McAnally
  • Jacob Thomas

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.

Suggested Citation

  • Jeffrey D. Gramlich & Mary Lea McAnally & Jacob Thomas, 2001. "Balance Sheet Management: The Case of Short‐Term Obligations Reclassified as Long‐Term Debt," Journal of Accounting Research, Wiley Blackwell, vol. 39(2), pages 283-295, September.
    • Handle: RePEc:bla:joares:v:39:y:2001:i:2:p:283-295
    DOI: 10.1111/1475-679X.00013
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    Cited by:

    1. Qi Chen & Tracy R. Lewis & Katherine Schipper & Yun Zhang, 2017. "Uniform Versus Discretionary Regimes in Reporting Information with Unverifiable Precision and a Coordination Role," Journal of Accounting Research, Wiley Blackwell, vol. 55(1), pages 153-196, March.
    2. Wei Jiang & Meiting Lu & Yaowen Shan & Tingting Zhu, 2016. "Evidence of Avoiding Working Capital Deficits in Australia," Australian Accounting Review, CPA Australia, vol. 26(1), pages 107-118, March.
    3. Sven Klingler & Olav Syrstad, 2021. "Disclosing the Undisclosed: Commercial Paper As Hidden Liquidity Suffers," Working Paper 2021/16, Norges Bank.
    4. Bischof, Jannis & Wüstemann, Jens, 2007. "How does fair value measurement under IAS 39 affect disclosure choices of European banks?," Papers 07-75, Sonderforschungsbreich 504.

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