Accounting for Leases and Corporate Investment
52 Pages Posted: 27 Jul 2018 Last revised: 31 Dec 2019
Date Written: December 31, 2019
We examine the real effects of lease capitalization rules (i.e., standards that require firms to capitalize finance leases) on corporate investment. We hypothesize that, in order to comply with these standards, managers collect, process, and disclose additional information, which leads them to reassess their investment decisions. Exploiting the adoption of lease capitalization rules in six countries in 2003 and 2005, we show that the introduction of these rules leads to a decrease in firm-level investment. The effect of lease capitalization on investment is more pronounced for firms with a higher reliance on leases and for firms with lower disclosure quality prior to the change in lease standards. Financially constrained firms experience larger decreases in investment. This is consistent with our findings being driven, at least in part, by an increase in the cost of external financing as creditors and investors gain access to additional information about a firm’s lease commitments.
Keywords: Lease, Investment, Cost of debt, Disclosure
JEL Classification: G31, M41
Suggested Citation: Suggested Citation