Michael Kisser

Contemporary Accounting Research 42(4) p. 2357-2391 Doi: https://doi.org/10.1111/1911-3846.13060

The Statement of Financial Accounting Standards (SFAS) No. 158 mandates the recognition of previously disclosed off–balance sheet liabilities (OBLs) for sponsors of defined benefit (DB) retirement plans. This recognition significantly increases reported liabilities, with notable variation across DB plan sponsors. We find that unrated DB plan sponsors reduce financial leverage following OBLs recognition, driven by net debt retirements and net equity issuances. These adjustments appear optimal because they bring firms closer to their estimated leverage targets. In contrast, DB plan sponsors with tight, floating‐GAAP covenants also reduce financial leverage, primarily through net debt retirements. The evidence suggests that on–balance sheet reporting requirements impact capital structure decisions through a rating or a covenant channel.

Journal of Empirical Finance 67 p. 196-216 Doi: https://doi.org/10.1016/j.jempfin.2022.03.007

We contribute to the literature on “market timing” by exploring periods of simultaneous equity issues and debt retirements (a leverage decreasing recapitalization, LDR). Contrary to traditional equity issues, LDRs are predicted by measures of creditor control whereas capital investment has no such predictive power. Nevertheless, LDRs occur after stock price run- ups and in periods of high valuation which subsequently decrease. The valuation dynamics are robust and also obtain for subsamples of LDR firms violating financial covenants. A comparison to debt retirements financed by illiquid asset sales and an analysis of discretionary cost items further corroborates the interpretation that LDR firms successfully “time the market” to finance the debt retirement.

Review of Finance 25(4) p. 1089-1128 Doi: https://doi.org/10.1093/rof/rfaa032

With zero capital structure rebalancing costs, dynamic trade-off theory predicts that firms stay at their leverage targets with more profitable firms staying at higher leverage. This prediction is rejected by the robustly negative correlation between leverage and profitability. When rebalancing costs are added to this theory, it predicts a positive leverage–profitability correlation only in periods where companies pay these costs and actively rebalance their capital structures. However, we show that the correlation is negative when firms issue debt and distribute the proceeds to shareholders—precisely the case where the theory predicts it should be positive. Our results thus resurrect the leverage–profitability puzzle.

Review of Finance 25(2) Doi: https://doi.org/10.1093/rof/rfaa018

We test whether high-frequency net-debt issuers (HFIs)—public industrial companies with relatively low issuance costs and high debt-financing benefits—manage leverage toward long-run targets. Our answer is they do not: (1) the leverage–profitability correlation is negative even in quarters with leverage rebalancing; (2) the speed-of-adjustment to target leverage deviations is no higher for HFIs than for low-frequency net-debt issuers; and (3) under-leveraged HFIs do not speed up rebalancing activity in significant investment periods. Thus, even in the subset of firms most likely to follow dynamic trade-off theory, the theory does not appear to hold.

Journal of Accounting Research 55(5) p. 1213-1255 Doi: https://doi.org/10.1111/1475-679X.12182