Lease Reporting and Credit Markets

We examine the impact of the new lease standard (ASC 842) on credit markets. We show that, following the adoption of ASC 842, firms that rely heavily on operating leases (i.e., high lease intensity firms) experience a decline in syndicated loan spreads. This decline is more pronounced when firms are financially distressed, when syndicate lead arrangers are relatively inexperienced and when the uncertainty surrounding operating lease assets and liabilities in the pre-period is higher. We also document a decline in the secondary bond market yield spreads of high lease intensity firms relative to low lease intensity firms, which is more pronounced for speculative and short maturity bonds. These changes in the level and term structure of bond yields are consistent with a decline in uncertainty regarding firms’ asset values and default barrier, and with a resulting reduction in transparency spreads (Duffie and Lando 2001; Giesecke 2006). Taken together, our results do not support the concerns voiced by some firms and politicians that the capitalization of operating leases would lead to higher cost of debt.