Accounting for leases and corporate investment

Chen, Ciao-Wei, Correia, Maria ORCID: 0000-0002-1766-9427 and Urcan, Oktay (2023) Accounting for leases and corporate investment. Accounting Review, 98 (3). 109 - 133. ISSN 0001-4826

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Abstract

We examine the real effects of lease capitalization rules (i.e., standards that require firms to capitalize finance leases) on corporate investment. We show that the introduction of these rules leads to a decrease in investment, which is more pronounced for firms with high reliance on leases. We posit and find that lease capitalization affects investment via a learning channel and a contracting channel. Regarding the first channel, we argue that managers identify areas of overinvestment and activities that should be discontinued or downsized because of the information they collect and analyze to comply with lease capitalization rules. Accordingly, we find that the effect of lease capitalization is stronger when learning opportunities are higher. Regarding the second channel, we argue that lease capitalization affects investment via its effect on contracts. Accordingly, we document an increase in the likelihood of covenant breaches and a stronger decline in investment for financially constrained firms.

Item Type:	Article
Official URL:	https://meridian.allenpress.com/accounting-review
Additional Information:	© 2022 American Accounting Association
Divisions:	Accounting
Subjects:	H Social Sciences > HF Commerce > HF5601 Accounting H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting; Fixed Investment and Inventory Studies M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
Date Deposited:	26 Oct 2022 14:48
Last Modified:	20 Dec 2024 00:46
URI:	http://eprints.lse.ac.uk/id/eprint/117182

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