The effect of ASC 842 leases on bond yields

Abstract

This study examines how the formal recognition of lease liabilities required by ASC 842 affects corporate bonds pricing. We document significant bond yield increases with the unexpected off-balance sheet liability revealed by the company. The yield reaction displays an asymmetric pattern, with an increase in yields for previously underestimated operating lease liabilities, but no correction for overestimations. Credit ratings are more likely to be downgraded at firms with severely underestimated operating leases. Collectively, our results suggest that ASC 842 has implications for corporate bond pricing.