Did the Recognition of Operating Leases Cause a Decline in Equity Valuations?
46 Pages Posted: 15 Jan 2020 Last revised: 9 Apr 2021
Date Written: March 28, 2021
We examine whether investors react to a significant change in balance sheets, absent a significant change in underlying economics. Beginning in 2019, ASC 842 requires the recognition of operating leases, which were previously only disclosed in the footnotes to the financial statements. This change in accounting standard results in firms with significant operating leases recognizing a considerable increase in debt. We find that firms with significant operating leases, on average, earn negative returns around the initial recognition of their operating leases. For example, firms in the top decile of operating lease intensity experience a mean abnormal return of -3.10% around their first quarter 2019 earnings announcements. We do not find that concurrent trade tensions between the United States and China explain the valuation decline. Our results provide timely, new evidence consistent with equity market prices reflecting an inadequate level of fundamental analysis.
Keywords: market efficiency; fundamental analysis; valuation; leases; ASC 842
JEL Classification: G10, G12, G14, M40, M41, M48
Suggested Citation: Suggested Citation