Market Recognition of the Accounting Disclosure and Economic Benefits of Operating Leases: Evidence from Borrowing Costs and Credit Ratings

40 Pages Posted: 19 Apr 2014

See all articles by Steve C. Lim

Steve C. Lim

Texas Christian University - M.J. Neeley School of Business

Steven C. Mann

Texas Christian University - M.J. Neeley School of Business

Vassil T. Mihov

Texas Christian University - M.J. Neeley School of Business

Date Written: April 17, 2014

Abstract

We contribute to the current debate on the accounting treatment of operating leases by providing evidence from bond markets and private lending on the market recognition of the role of leasing in determining borrowing costs and credit ratings. Borrowing costs and credit ratings are less sensitive to lease obligations than to debt financing for firms that are financially constrained or have lower marginal tax rates, consistent with theoretical predictions based on tax sharing and bankruptcy costs. Firms closer to ratings borderlines lease more, especially those firms around the investment grade borderline. Our evidence suggests that leasing provides financial flexibility to some firms, relative to debt financing, by preserving or extending credit capacity, and that the credit markets evaluate the economic characteristics of operating leases and treat them differently in their pricing. Our finding on the differential pricing in the credit market is particularly relevant to the current lease accounting debate because the mandatory capitalization under the proposed new accounting rule might curtail such differentiation, diminishing the information value of financial statements. We expect to observe a continuing demand for leases independent of accounting treatments as long as there are economic benefits associated with lease transactions such as preserving or expanding credit capacity.

Suggested Citation

Lim, Steve and Mann, Steven Carl and Mihov, Vassil T., Market Recognition of the Accounting Disclosure and Economic Benefits of Operating Leases: Evidence from Borrowing Costs and Credit Ratings (April 17, 2014). Available at SSRN: https://ssrn.com/abstract=2426433 or http://dx.doi.org/10.2139/ssrn.2426433

Steve Lim (Contact Author)

Texas Christian University - M.J. Neeley School of Business ( email )

2900 Lubbock Street
Fort Worth, TX 76129
United States
817-257-7536 (Phone)

Steven Carl Mann

Texas Christian University - M.J. Neeley School of Business ( email )

Campus Box 298530
Fort Worth, TX 76129
United States
817-257-7569 (Phone)
817-257-7227 (Fax)

Vassil T. Mihov

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States
817-257-7147 (Phone)
817-257-7227 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
364
Abstract Views
1,670
rank
80,187
PlumX Metrics