A New Lease on Firm Behavior

77 Pages Posted: 23 Sep 2020 Last revised: 27 Sep 2023

See all articles by Matteo Binfarè

Matteo Binfarè

University of Missouri at Columbia - Department of Finance

Robert A. Connolly

University of Florida

Fotis Grigoris

University of Iowa - Department of Finance

Crocker Herbert Liu

Cornell University - School of Hotel Administration

Date Written: August 12, 2020

Abstract

When firms have discretion in valuing their balance sheet debt, how do they make this valuation decision given its impact on firm value? Firms make extensive use of operating leases, but unlike other types of debt, their balance sheet value is set by the firm. Using novel information on operating leases, we examine firm behavior in valuing these leases. We find that 20% of firms report higher-than-expected rates, reflecting their cost of unsecured rather than collateralized borrowing. These firms have poor information quality, operate in competitive markets, and understate lease and debt ratios by 15%.

Keywords: ASC 842, Capital Structure, Discount Rate, Operating Lease, Secured Debt

JEL Classification: G00, G30, G31, G32, M40, M41

Suggested Citation

Binfarè, Matteo and Connolly, Robert A. and Grigoris, Fotis and Liu, Crocker Herbert, A New Lease on Firm Behavior (August 12, 2020). Available at SSRN: https://ssrn.com/abstract=3672699 or http://dx.doi.org/10.2139/ssrn.3672699

Matteo Binfarè (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States

HOME PAGE: http://www.matteobinfare.com

Robert A. Connolly

University of Florida ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Fotis Grigoris

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

Crocker Herbert Liu

Cornell University - School of Hotel Administration ( email )

435B Statler Hall
Ithaca, NY 14853-6902
United States

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