Financial statement characteristics of firms engaging in in-substance defeasance of debt

In-substance defeasance permits managers to shift reported income from future periods to current periods by recording defeasance gains. In-substance defeasance also reduces debt-related financial ratios by reducing the amount of debt reported in the balance sheet. Financial statement characteristics...

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Bibliographic Details
Published in:RBER, review of business and economic research review of business and economic research, 1991-04, Vol.26 (2), p.59
Main Authors: Jeffords, Raymond, Apostolou, Barbara, Apostolou, Nicholas G
Format: Article
Language:English
Subjects:
Accounting theory
Analysis
Comparative studies
Debt financing (Corporations)
Debt management
Defeasance
Economic models
Financial statements
Management
Manyindustries
Regression analysis
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Summary:In-substance defeasance permits managers to shift reported income from future periods to current periods by recording defeasance gains. In-substance defeasance also reduces debt-related financial ratios by reducing the amount of debt reported in the balance sheet. Financial statement characteristics are examined for firms engaging in in-substance defeasance of debt. The sample consists of 93 transactions by 88 firms over the period 1982-1987. Defeased firms are found to have, on average, 15% more debt than defeasible firms. Empirical evidence suggests that defeased firms are more highly leveraged than defeasible firms in conformance with positive accounting theory. Moreover, low-coupon debt is more likely to be defeased than high-coupon debt. Because firms are more likely to defease low-coupon debt, in-substance defeasance appears to be used as both a debt management tool and as a means of improving earnings performance via discretionary defeasance gains.
ISSN:0362-7985
1058-3300
1873-5924