Balance sheet management: The case of short term obligations reclassified as long-term debt

We investigate potential management of balance sheet ratios by a sample of firms that reclassify short-term obligations to long-term debt and subseque ntly declassify, that debt (return it to the current liability section). Al though aggregate measures of liabilities and equity remain unchanged when f irms reclassify (declassify), the practice does increase (decrease) reporte d measures of liquidity, such as the current ratio, and long-term leverage. Our results suggest that firms reclassify and declassify to smooth reporte d liquidity and leverage, relative to the prior year and to industry benchm arks. Our evidence is also consistent with firms working around restrictive debt covenants.