Does Recognizing Operating Leases Influence Loan Spreads? Evidence from Japan

ABSTRACT In Japan, after the adoption of IFRS 16, Leases, IFRS adopting firms recognize operating leases as well as finance leases on the balance sheet, whereas Japanese GAAP adopting firms do not recognize but still disclose operating leases in the notes. Employing Japan’s unique institutional setting, this study explores the impact of recognition versus disclosure of operating leases on information risk as measured by short-term loan spreads. Loan spreads for recognition firms that voluntarily adopt IFRS decrease more after IFRS 16 implementation than those for disclosure firms that adopt Japanese GAAP. In particular, loan spreads for recognition firms with lower operating lease intensity decrease more substantially than those for recognition firms with higher operating lease intensity. Overall, our findings indicate that the balance sheet recognition of operating leases reduces firms’ information risk and decreases loan spreads. Data Availability: All data are available from the commercial data sources cited in this paper. JEL Classifications: M41; M48.