Download This PaperA New Lease on Firm Behavior
77 Pages Posted: 23 Sep 2020 Last revised: 27 Sep 2023
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A New Lease on Firm Behavior
Date Written: August 12, 2020
Abstract
When firms have discretion in valuing their balance sheet debt, how do they make this valuation decision given its impact on firm value? Firms make extensive use of operating leases, but unlike other types of debt, their balance sheet value is set by the firm. Using novel information on operating leases, we examine firm behavior in valuing these leases. We find that 20% of firms report higher-than-expected rates, reflecting their cost of unsecured rather than collateralized borrowing. These firms have poor information quality, operate in competitive markets, and understate lease and debt ratios by 15%.
Keywords: ASC 842, Capital Structure, Discount Rate, Operating Lease, Secured Debt
JEL Classification: G00, G30, G31, G32, M40, M41
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