Efficiency Gains from Accounting Regulatory Compliance

Abstract

My study examines whether the process of complying with new accounting standards has positive spillover effects on operating efficiency and firm performance. Using the recent lease accounting standard change (ASC-842), I examine whether the requirement to capitalize operating leases increases efficiency through managerial learning. To separate managerial learning from the potential benefits of enhanced disclosures, I exploit the relatively long transition period (2017-2018), wherein managers have access to new lease-related information that has not been disclosed to the market. I find that firms with a high proportion of operating leases experience an increase in profitability during the transition period relative to other firms. Further analysis shows that the increase in profitability is associated with a reduction in rent expenses and cost of goods sold. I document that these firms experience a decline in the level of operating leases during the transition period relative to other firms. I also provide evidence that this decrease in operating leases is not driven by substitution to capital leases or purchase of property, plant, and equipment. In cross-sectional analyses, I find that the results are concentrated in firms that have a poor internal information environment and high business complexity. These results are robust to entropy balancing and to controlling for a host of firm characteristics. Overall, my results support the claim that even though managers view new accounting standards as a burden, the information generated through the compliance process can lead to efficiency gains.