Do Changes in Accounting Standards affect Corporate Credit Ratings?

R. Basu, James Patrick Naughton

Research output: Working paper

Abstract

We use SFAS 158 to show that corporate credit ratings are sensitive to whether accounting information is recognized or disclosed in the firm’s financial statements. SFAS 158 did not prescribe any new financial information. Rather, it simply required the recognition of the funded position of a firm’s defined benefit pension plan, which was previously disclosed in the footnotes, on its balance sheet. Our results show that firms with larger increases in the recognized pension liability due to SFAS 158 received higher corporate credit ratings after the standard change. We use the actual quantitative adjustments for pensions made by Standard & Poor’s (“S&P”) to show that these higher ratings are attributable to differences in how financial statements were adjusted before and after the new standard. We find that the quantitative adjustments made by S&P prior to SFAS 158 penalized firms relative to the combination of the SFAS 158 changes and the adjustments made post-SFAS 158. Our results suggest that credit ratings, which are a critical determinant of the cost of capital and capital structure for many firms, are not independent of changes to the provisions of U.S. GAAP.
Original languageEnglish (US)
Number of pages48
StatePublished - Jan 2016

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