Accounting for Leases and Corporate Investment
The Accounting Review, Forthcoming
51 Pages Posted: 15 Aug 2022
There are 2 versions of this paper
Accounting for Leases and Corporate Investment
Date Written: July 10, 2022
Abstract
We examine the real effects of lease capitalization rules (i.e., standards that require firms to capitalize finance leases) on corporate investment. We show that the introduction of these rules leads to a decrease in investment, which is more pronounced for firms with high reliance on leases. We posit and find that lease capitalization affects investment via a learning channel and a contracting channel. Regarding the first channel, we argue that managers identify areas of overinvestment and activities that should be discontinued or downsized because of the information they collect and analyze to comply with lease capitalization rules. Accordingly, we find that the effect of lease capitalization is stronger when learning opportunities are higher. Regarding the second channel, we argue that lease capitalization affects investment via its effect on contracts. Accordingly, we document an increase in the likelihood of covenant breaches and a stronger decline in investment for financially constrained firms.
Keywords: Lease, Investment, Disclosure, Real effects
JEL Classification: G31, M41
Suggested Citation: Suggested Citation