Capital Structure Effects Associated with the New Lease Accounting Standard

38 Pages Posted: 26 Jul 2022

See all articles by Petrus (Petri) Ferreira

Petrus (Petri) Ferreira

Rice University

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Brian Rountree

Rice University - Jesse H. Jones Graduate School of Business

Date Written: June 2022

Abstract

This study finds that the requirement of ASC 842 for firms to capitalize operating leases in financial statements beginning in 2019 resulted in firms affected by the standard reducing existing debt amounts on average between 7% and 10% relative to unaffected firms. We also find that firms with greater operating lease capitalization as a result of implementation of ASC 842 are more likely to reduce their reliance on existing debt. In addition, the relative decrease in existing debt associated with adoption of the leasing standard is concentrated among firms whose debt contracts are less likely to adjust for changes in accounting standards, those with a higher likelihood of violating loan covenants, and those whose capital structures are more affected by the standard than other firms in their industry. Taken together, these findings suggest that contracting costs play a significant role in firms’ relative decrease in existing debt following implementation of ASC 842.

Keywords: Contracting costs, ASC 842, Operating leases

JEL Classification: G14, G21, G28, M41, M48

Suggested Citation

Ferreira, Petrus H. and Landsman, Wayne R. and Rountree, Brian Robert, Capital Structure Effects Associated with the New Lease Accounting Standard (June 2022). Kenan Institute of Private Enterprise Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4150861 or http://dx.doi.org/10.2139/ssrn.4150861

Petrus H. Ferreira (Contact Author)

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Brian Robert Rountree

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

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