Operating Lease Accounting Information and Equity Risk
Asian Tax Journal Vol. 1 No. 1 (2000), pp. 101-124
Abstract
Operating Leases, which do not appear on a firm's balance sheet under current accounting standards, continue to grow in popularity as a means of obtaining the use of capital equipment. Using a 2.438 sample of lease contracts firms from 1991 to 1996, this paper empirically tests some of the firm-specific variables that have been theoretically linked to the use of operating leases. Consistent with theoretical predictions, I find a significant positive relation between leverage ratio, a significant negative relation between firm size and operating leases. Also this study investigates whether equity risk reflects treatment of an operating lease as an asset and liability. Using a 209 sample of operating lease contracts firms, I find a significant relation between equity risk and the adjustment to the debt-equity ratio for operating leases. Thus this study provides evidence that investors evaluate operating lease asset and liability values when assessing equity risk. Understanding the balance sheet consequences will likely become increasingly important as the international trends that operating leases should be capitalized continues to gain favor with users and standard setters.
Keywords
- operating lease
- capital lease
- lease accounting