Recognition Versus Disclosure: Operating Lease Capitalization and Managerial Leasing Decisions

Abstract

I examine whether and how the recognition of operating leases on balance sheets influences managerial leasing decisions. In 2019 the FASB implemented ASC 842, which requires companies to capitalize operating leases. Given prior operating lease disclosure in footnotes, it was unclear if capitalization would affect financial statement users or managers. I find that firms' use of operating leases decreases upon the new standard's adoption and that this decline is driven by lease-intensive and less-levered firms. I also document a systematic substitution of operating leases with short-term and variable leases, both of which can still be left off balance sheet. The latter finding suggests that the FASB has not entirely succeeded in preventing firms from opportunistically omitting liabilities from balance sheets. My study responds directly to the FASB's call for research that examines the new standard's unintended consequences on managerial leasing decisions. Overall, I provide evidence that disclosure location (footnote vs. balance sheet) exerts a real effect on managerial behavior.

Keywords: Operating Lease; ASC 842; ASU 2016-02; Off-Balance-Sheet; Real Effects

JEL Classification: E22; G32; G38; M41