Abstract
The objective of this research was to define and empirically test the effect of Financial Interpretation No. 46 (FIN 46) on electric utility companies. FIN 46 requires that Variable Interest Entities be reviewed and their financial information be consolidated in their primary beneficiary financial statements. When FIN 46 was issued, the electric utility companies expected that, in consolidated statements, their liabilities would increase to the degree that the result would be an increase in their cost of capital. Therefore, we expected that the implementation of FIN 46 would result in an increase in the cost of obtaining capital in electric utility companies. The results did not support this supposition. We found no significant changes in the cost of capital (when measured by changes in companies' bond rating) that could be associated with additional consolidation resulting from FIN 46. The two tests used in this study (T-test and Probit analysis) did not provide significant evidence that companies affected by FIN 46 were different from those that were not affected. We did find, however, that electric companies that were smaller and reported lower debt were affected by the FIN 46 requirement more than their larger counterparts. Some results suggest that the complete effect of FIN 46 is yet to be included in some of the electric utility companies' statements. Not considering the possible influence of such future effects, however, our results suggest that FIN 46 has not had a significant and costly effect on the electric utility companies.
Published Version
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