A New Lease on Firm Behavior

Binfarè, Matteo; Connolly, Robert A.; Grigoris, Fotis; Liu, Crocker Herbert

doi:10.2139/ssrn.3672699

A New Lease on Firm Behavior

70 Pages Posted: 23 Sep 2020 Last revised: 22 Feb 2021

See all articles by Matteo Binfarè

Matteo Binfarè

University of Missouri at Columbia - Department of Finance

Robert A. Connolly

Miami Herbert Business School - Department of Finance

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 new reporting requirements (ASC 842) we examine firm behavior in valuing these leases, specifically, discount rate choices. We find 20 percent of firms choose higher discount rates (report lower lease-related leverage) than expected. The discount rate chosen reflects the cost of unsecured debt instead of collateralized borrowing. We consider potential motives for these choices. We find that financially fragile and informationally opaque firms choose higher discount rates, apparently to appear healthier.

Keywords: ASC 842, Capital Structure, Discount Rate, Operating Lease, Leverage

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

Suggested Citation: 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