Hidden Leverage in Nonfinancial Corporations

A substantial portion of corporate debt remains hidden from balance sheets. I document two forms of off-balance-sheet leverage in nonfinancial corporations: operating leases (pre-2019) and intraperiod borrowing—short-term debt issued and repaid within reporting periods, which I am the first to study in nonfinancial firms. Approximately 29 percent of publicly traded firms used substantial operating leases and 12 percent show evidence of substantial intra-period borrowing, with a disproportionate subset using both types of hidden debt. Firms using substantial hidden leverage are generally smaller, more reliant on short-term funding, are less monitored by sophisticated market participants, and report lower leverage, suggesting they use off-balance-sheet debt to project false leverage profiles. When accounting changes in 2019 revealed substantial operating leases, affected firms subsequently cut capital expenditures by 25 percent and R&D by 14 percent, faced heightened risks of executive turnover and stakeholder scrutiny, and experienced more frequent accounting problems. Critically, revelation of substantial operating leases caused these exposed firms to curtail their intra-period borrowing and to raise their reported non-lease leverage.