Evidence that Market Participants Assess Recognized and Disclosed Items Similarly When Reliability Is Not an Issue

Posted: 30 Oct 2012 Last revised: 24 Jun 2015

See all articles by Brian Bratten

Brian Bratten

University of Kentucky - Von Allmen School of Accountancy

Preeti Choudhary

University of Arizona, Eller College of Management

Katherine Schipper

Duke University - Fuqua School of Business

Date Written: July 1, 2013

Abstract

We provide evidence that disclosed items are not processed differently from recognized items when the disclosures are salient, not based on management estimates and amenable to simple techniques for imputing as-if recognized amounts. For a sample of firms with both capital and operating leases, we find that as-if recognized amounts for leases are generally reliable and that both recognized lease obligations and disclosed lease obligations are associated with proxies for costs of debt and equity. The magnitudes of these associations are not statistically different across accounting treatments, suggesting that market participants impound as-if recognized operating lease obligations and recognized capital lease obligations similarly into costs of capital. Conditioning on the reliability of as-if recognized operating lease obligations, we find a difference in the association between recognized versus as-if recognized lease obligations and proxies for the costs of debt and equity when the operating lease disclosures are less reliable.

Keywords: recognition vs. disclosure, reliability, leases, costs of capital

JEL Classification: M41

Suggested Citation

Bratten, Brian and Choudhary, Preeti and Schipper, Katherine, Evidence that Market Participants Assess Recognized and Disclosed Items Similarly When Reliability Is Not an Issue (July 1, 2013). Accounting Review, Vol. 88, No. 4, pp. 1179-1210, 2013. Available at SSRN: https://ssrn.com/abstract=2168362 or http://dx.doi.org/10.2139/ssrn.2168362

Brian Bratten

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States

Preeti Choudhary (Contact Author)

University of Arizona, Eller College of Management ( email )

School of Accountancy
Tucson, AZ 85721
United States

Katherine Schipper

Duke University - Fuqua School of Business

Box 90120
Durham, NC 27708-0120
United States

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