Abstract

This study finds that the requirement of ASC 842 for firms to capitalize operating leases in financial statements beginning in 2019 resulted in firms affected by the standard reducing existing debt amounts on average between 7% and 10% relative to unaffected firms. We also find that firms with greater operating lease capitalization as a result of implementation of ASC 842 are more likely to reduce their reliance on existing debt. In addition, the relative decrease in existing debt associated with adoption of the leasing standard is concentrated among firms whose debt contracts are less likely to adjust for changes in accounting standards, those with a higher likelihood of violating loan covenants, and those whose capital structures are more affected by the standard than 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.

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• Keyword(s):
• accounting 109

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