A New Lease on Secured Debt

78 Pages Posted: 23 Sep 2020 Last revised: 8 Aug 2022

See all articles by Matteo Binfarè

Matteo Binfarè

University of Missouri at Columbia - Department of Finance

Robert A. Connolly

University of Florida

Fotis Grigoris

Indiana University - Kelley School of Business - Department of Finance

Crocker Herbert Liu

Cornell University - School of Hotel Administration

Date Written: August 12, 2020

Abstract

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 from the recently implemented Accounting Standard Update 842, we examine firm behavior in recognizing the value of these leases. Specifically, we focus on the disclosed discount rate that each firm uses to value its lease portfolio. Although the cost of operating lease debt should, in principle, mirror the firm's cost of non-lease secured debt, we find that one-in-five firms disclose lease discount rates that are much higher than an outsider of the firm would expect. Notably, these high discount rates often reflect the firm's cost of unsecured debt rather than the firm's cost of collateralized borrowing. These firms tend to have poor information quality and financial health, and typically operate in competitive product markets. As a result of higher-than-expected discount rates, these firms underreport lease and debt ratios by about 15%. We also use the more granular disclosures associated with ASC 842 to shed new light on other dimensions of a firm's operating lease portfolio, such as the average life of a firm's operating leases, the firm's propensity to take out leases with embedded options, and connect pre-ASC 842 to post-ASC 842 balance sheet values.

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 Secured Debt (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

Indiana University - Kelley School of Business - Department of Finance

1309 E. 10th St.
Bloomington, IN 47405
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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