Capitalization Versus Disclosure: The Impact of Operating Lease Capitalization on Managerial Leasing Decisions

Abstract

I examine whether and how the recognition of operating leases on balance sheets influences managerial leasing decisions. In 2019, the FASB implemented ASC 842, which requires companies to capitalize operating leases. Because operating lease information was previously disclosed in footnotes, it was unclear whether capitalization would make any difference to managers or financial statement users. Upon the new standard's adoption, I find a marked decrease in firms' use of operating leases. This decline is driven by lease-intensive and less-levered firms. I also document a systematic substitution of operating leases with short-term and variable leases, which are both still allowed to be left off balance sheet. These findings consistently suggest that the elimination of perceived off-balance-sheet reporting benefits serves as the channel through which the new standard affects leasing decisions. Overall, I provide evidence that disclosure location (footnote vs. balance sheet) exerts a real effect on managerial behavior. This study responds directly to the FASB's call for research that examines the standard's real effects.