Accounting for Leases and Corporate Investment

52 Pages Posted: 27 Jul 2018 Last revised: 31 Dec 2019

See all articles by Ciao-Wei Chen

Ciao-Wei Chen

University of Illinois at Urbana-Champaign - Department of Accountancy

Maria M. Correia

London School of Economics and Political Science

Oktay Urcan

University of Illinois at Urbana-Champaign

Date Written: December 31, 2019

Abstract

We examine the real effects of lease capitalization rules (i.e., standards that require firms to capitalize finance leases) on corporate investment. We hypothesize that, in order to comply with these standards, managers collect, process, and disclose additional information, which leads them to reassess their investment decisions. Exploiting the adoption of lease capitalization rules in six countries in 2003 and 2005, we show that the introduction of these rules leads to a decrease in firm-level investment. The effect of lease capitalization on investment is more pronounced for firms with a higher reliance on leases and for firms with lower disclosure quality prior to the change in lease standards. Financially constrained firms experience larger decreases in investment. This is consistent with our findings being driven, at least in part, by an increase in the cost of external financing as creditors and investors gain access to additional information about a firm’s lease commitments.

Keywords: Lease, Investment, Cost of debt, Disclosure

JEL Classification: G31, M41

Suggested Citation

Chen, Ciao-Wei and Correia, Maria M. and Urcan, Oktay, Accounting for Leases and Corporate Investment (December 31, 2019). Available at SSRN: https://ssrn.com/abstract=3214846 or http://dx.doi.org/10.2139/ssrn.3214846

Ciao-Wei Chen

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Maria M. Correia

London School of Economics and Political Science ( email )

Houghton St
London, London WC2A 2AE
United Kingdom

Oktay Urcan (Contact Author)

University of Illinois at Urbana-Champaign ( email )

515 E. Gregory Drive
4009 BIF MC-520
Champaign, IL 61820
United States
217-265-0383 (Phone)
217-244-0902 (Fax)

HOME PAGE: http://business.illinois.edu/profile/oktay-urcan/

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