Proposed new lease standard -Do investors adjust for capitalized operating leases in their assessment on market value of equity?

Abstract

BACKGROUND AND PROBLEM DISCUSSION Leases are a common way for companies to acquire assets. However, the current lease regulation is criticized and a proposed new lease standard (exposure draft) has been released. The presented changes in the new exposure draft include capitalizing all leases, which will affect companies’ financial ratios. These regulation changes may affect the market value for affected companies. PURPOSE The purpose of this paper is to describe and explore the effects and possible consequences capitalizing operating leases has on market value of equity. We want to investigate if investors already adjust for capitalized operating leases in their assessment of market value of equity. RESEARCH DESIGN AND METHOD Our purpose and hypothesis is investigated by capitalizing operating leases. All data is collected from DataStream and processed using a constructive capitalization model. The capitalized data is then tested against our hypothesis using a regression model. RESULT AND CONCLUSION Our results indicate that investors do not adjust current market value of equity for capitalized operating leases. SUGGESTION AND FURTHER RESEARCH An event study for the same companies after the implementation of the new standard would be interesting to see if the new standard in fact has an effect on market value of equity.