Capital Structure Effects Associated with the New Lease Accounting Standard

This study finds that the requirement of Accounting Standard Codification (ASC) 842 for firms to capitalize operating leases in financial statements beginning in 2019 resulted in firms affected by the standard reducing the reliance on existing debt (debt not associated with the capitalization of operating leases) by 7%–10% on average relative to unaffected firms. We find that firms with greater operating lease capitalization as a result of implementation of ASC 842 have the largest reductions in the reliance on existing debt. In addition, the relative decrease in existing debt associated with adoption of the standard is concentrated among firms whose debt contracts are less likely to be based on a fixed set of accounting standards, those with a higher likelihood of violating loan covenants, and those whose capital structures are more affected by the standard relative to other firms in their industry. Taken together, these findings suggest that contracting costs play a significant role in firms’ relative decrease in existing debt following implementation of ASC 842. Much of the related literature on ASC 842 documents efforts to reduce the impact of the lease standard prior to adoption. In contrast, our findings suggest that firms were unable to offset completely the increased leverage effects from the adoption of the standard, resulting in affected firms additionally reducing their reliance on existing debt. This paper was accepted by Suraj Srinivasan, accounting. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2024.04447 .