Economic Consequences of a New Accounting Standard for Leases

Abstract

This thesis examines the economic consequences of the introduction of a new lease accounting standard (ASC 842) in the United States. The previous lease accounting standards, employed under both IFRS and US GAAP, required leases to be classified either as operating leases (disclosed in the notes to the financial statements) or finance leases (recognised in the financial statements), according to the nature of the rights and obligations agreed. Under the new lease accounting standard, all leases of more than a 12-months duration must be capitalised and recognised on the balance sheets of lessees. I investigate the economic consequences of the new standard from three perspectives. First, I examine lessees' financing decisions in response to the changes in the new lease accounting standard and find that operating lease-intensive firms reduced their usage of operating leases during the period leading up to the adoption of the new lease standard. However, their reliance on finance leases only increased in the early stage of the development of the new standard. There is no evidence that operating lease-intensive firms adjusted their reliance on debt finance in response to future (potential) changes in the lease accounting standard. Second, I investigate stock price reactions to key events leading to the adoption of the new lease accounting standard. The adoption of the new standard had the potential to bring both benefits and costs to lessees. If investors believed the overall benefits of the new standard outweighed its overall costs, there should be positive market reactions to the public disclosure of events that increased the likelihood of adoption of the new standard and negative market reactions to events that decreased this likelihood. Conversely, if investors believed the overall costs dominated the overall benefits, there should be negative market reactions to events that increased the adoption likelihood and positive market reactions to events that decreased the likelihood. In general, I find no evidence of equity market reactions for lessees to events in the regulatory process leading to the issuance of ASU No. 2016-02, Leases (Topic 842). Moreover, neither the precision of as-if recognised operating leases nor the strictness of debt covenant are associated with the magnitude of market reactions to events leading to the issuance of the new lease accounting standard. Finally, I investigate market reactions when firms adopt the new lease accounting standard for the first time. I find no abnormal market reactions when firms first adopt the new standard. Moreover, there is no significant association between the gap between the estimated and the reported operating lease intensity and the cumulative abnormal return. Show more