AAA Spark Meeting of Regions

Does Operating Lease Recognition Impact Credit Spread?

• In Event: Operating Leases and Non Arms Length and Leases

Abstract

In this paper, I explore the impact of operating lease accounting changes on the credit spread of corporate bonds. With the implementation of ASC 842, the firms are required to recognize operating leases as both assets and liabilities, significantly increasing the leverage on the accounting statements. Quite contrary to the hypothesis that bond investors will naively interpret the increased leverage as increased credit risk, I provide evidence that the credit spreads of corporate bonds have decreased after ASC 842 for the firms most affected by the accounting change, indicating that bond investors benefit from the accounting change. I further investigate the mechanism and show that the decreased credit spreads result from informational improvement and real reductions in operating leases. Overall, this paper contributes to our understanding of the role of accounting rules in bond investors' valuation.

Author

• Xinyuan Shao, University of Minnesota