A New Lease on Firm Behavior
70 Pages Posted: 23 Sep 2020 Last revised: 22 Feb 2021
Date Written: August 12, 2020
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