The Impact of Operating Leases and Purchase Obligations on Credit Market Prices

50 Pages Posted: 10 Oct 2011 Last revised: 25 May 2016

See all articles by Sandro C. Andrade

Sandro C. Andrade

University of Miami - Department of Finance

Elaine Henry

Stevens Institute of Technology - School of Business

Dhananjay Nanda

University of Miami - Department of Accounting

Date Written: March 1, 2014

Abstract

We document that credit spreads are positively related to two types of executory contracts: noncancellable operating leases and unconditional purchase obligations. However, while leases and purchase obligations receive the same treatment by the Bankruptcy Code and current financial reporting rules, the credit spread impact per unit of leverage from purchase obligations is substantially less than that from leases. We conjecture that the effect of executory contracts on credit spreads depends on how essential the underlying assets or services are for the functioning of a bankrupt firm as a going concern. Essential contracts are likely to be unconditionally assumed by bankruptcy trustees, thus representing potentially higher post-default losses for holders of unsecured debt. Our findings potentially inform accounting standards that propose recognizing firms' operating lease obligations in financial statements while continuing to require solely footnoted disclosure of purchase obligations.

Keywords: operating leases, purchase obligations, credit spreads, accounting standards

JEL Classification: G12, G18

Suggested Citation

Andrade, Sandro C. and Henry, Elaine and Nanda, Dhananjay, The Impact of Operating Leases and Purchase Obligations on Credit Market Prices (March 1, 2014). Available at SSRN: https://ssrn.com/abstract=1941896 or http://dx.doi.org/10.2139/ssrn.1941896

Sandro C. Andrade (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

HOME PAGE: http://moya.bus.miami.edu/~sandrade/

Elaine Henry

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Dhananjay Nanda

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
339
Abstract Views
1,808
rank
87,009
PlumX Metrics