An Examination of the Cost of Capital Implications of FIN 46

This study examines whether the adoption in 2003 of FASB Interpretation No. 46/R (FIN 46), Consolidation of Variable Interest Entities—An Interpretation of ARB No. 51, changed the cost of capital for affected firms. Using comparative analysis on a broad sample of 11,719 firm-quarter observations for...

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Bibliographic Details
Published in:The Accounting review 2012-07, Vol.87 (4), p.1105-1134
Main Authors: Callahan, Carolyn M., Smith, Rodney E., Spencer, Angela Wheeler
Format: Article
Language:English
Subjects:
Accounting theory
Balance sheets
Business structures
Capital costs
Capital investments
Cash flow
Comparative analysis
Cost of capital
Cost of equity
Debt management
Economic costs
Equity capital
Experimental methods
FASB Interpretations
FASB standards
Financial reporting
Firm theory
Impact analysis
Implicit costs
Investment risk
Off balance sheet items
U.S.A
Variable interest entities
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Summary:This study examines whether the adoption in 2003 of FASB Interpretation No. 46/R (FIN 46), Consolidation of Variable Interest Entities—An Interpretation of ARB No. 51, changed the cost of capital for affected firms. Using comparative analysis on a broad sample of 11,719 firm-quarter observations for 1,389 firms during the period 1998 through 2005, we find evidence that FIN 46 significantly increased the cost of equity capital for firms with affected variable interest entities (VIEs), an increase of approximately 50 basis points relative to firms reporting no material effect from the standard. Further, firms consolidating these formerly off-balance sheet structures experienced the largest increase. Taken together, these results suggest that FIN 46 reduced the opportunity for firms to use off-balance sheet structures to artificially reduce their cost of capital, a matter of regulatory concern.
ISSN:0001-4826
1558-7967
DOI:10.2308/accr-10272