IDEAS home Printed from https://ideas.repec.org/p/kue/epaper/e-16-016.html
   My bibliography  Save this paper

Effect of Capitalizing Operating Leases on Credit Ratings:Evidence from Japan

Author

Listed:
  • Masaki Kusano

Abstract

The purpose of this study is to examine the effects of constructively capitalizing operating leases on credit ratings in Japan. In particular, this study investigates whether and how a credit rating agency considers operating lease information when determining credit ratings. First, this study shows that constructively capitalized operating leases are associated with credit ratings. Second, this study finds that the associations between credit ratings and operating leases versus finance leases are not substantially different. However, when operating lease disclosures are less reliable, this study finds that operating leases are not associated with credit ratings and that the risk relevance of operating leases is substantially different from that of finance leases. This study reports that the reliability of accounting information has significant effects on the risk relevance of operating leases. These results indicate that a credit rating agency considers operating lease information in determining credit ratings to the extent that this information is reliable. This study contributes to the literature on the usefulness of operating lease disclosures and to the discussions on the global convergence of accounting standards.

Suggested Citation

  • Masaki Kusano, 2017. "Effect of Capitalizing Operating Leases on Credit Ratings:Evidence from Japan," Discussion papers e-16-016, Graduate School of Economics , Kyoto University.
    • Handle: RePEc:kue:epaper:e-16-016
    as

    Download full text from publisher

    File URL: http://www.econ.kyoto-u.ac.jp/dp/papers/e-16-016.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Vivien Beattie & Alan Goodacre & Sarah Thomson, 2000. "Recognition versus Disclosure: An Investigation of the Impact on Equity Risk Using UK Operating Lease Disclosures," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(9‐10), pages 1185-1224, November.
    2. Ely, Km, 1995. "Operating Lease Accounting And The Markets Assessment Of Equity Risk," Journal of Accounting Research, Wiley Blackwell, vol. 33(2), pages 397-415.
    3. Partha Sengupta & Zheng Wang, 2011. "Pricing of off‐balance sheet debt: how do bond market participants use the footnote disclosures on operating leases and postretirement benefit plans?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 51(3), pages 787-808, September.
    4. Sylvain Durocher & Anne Fortin, 2009. "Proposed Changes in Lease Accounting and Private Business Bankers' Credit Decisions," Accounting Perspectives, John Wiley & Sons, vol. 8(1), pages 9-42, February.
    5. Hamada, Robert S, 1969. "Portfolio Analysis, Market Equilibrium and Corporation Finance," Journal of Finance, American Finance Association, vol. 24(1), pages 13-31, March.
    6. Rubinstein, Mark E, 1973. "A Mean-Variance Synthesis of Corporate Financial Theory," Journal of Finance, American Finance Association, vol. 28(1), pages 167-181, March.
    7. Jennifer Altamuro & Rick Johnston & Shailendra (Shail) Pandit & Haiwen (Helen) Zhang, 2014. "Operating Leases and Credit Assessments," Contemporary Accounting Research, John Wiley & Sons, vol. 31(2), pages 551-580, June.
    8. Bowman, Robert G, 1979. "The Theoretical Relationship between Systematic Risk and Financial (Accounting) Variables," Journal of Finance, American Finance Association, vol. 34(3), pages 617-630, June.
    9. Rolf Uwe Fülbier & Jorge Lirio Silva & Marc Henrik Pferdehirt, 2008. "Impact of Lease Capitalization on Financial Ratios of Listed German Companies," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 60(2), pages 122-144, April.
    10. Ashbaugh-Skaife, Hollis & Collins, Daniel W. & LaFond, Ryan, 2006. "The effects of corporate governance on firms' credit ratings," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 203-243, October.
    11. Jeremy Michels, 2017. "Disclosure Versus Recognition: Inferences from Subsequent Events," Journal of Accounting Research, Wiley Blackwell, vol. 55(1), pages 3-34, March.
    12. Mary E. Barth & Greg Clinch & Toshi Shibano, 2003. "Market Effects of Recognition and Disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 41(4), pages 581-609, September.
    13. Robert Libby & Scott A. Emett, 2014. "Earnings presentation effects on manager reporting choices and investor decisions," Accounting and Business Research, Taylor & Francis Journals, vol. 44(4), pages 410-438, August.
    14. Elisabetta Barone & Jacqueline Birt & Soledad Moya, 2014. "Lease Accounting: A Review of Recent Literature," Accounting in Europe, Taylor & Francis Journals, vol. 11(1), pages 35-54, June.
    15. Sylvain Durocher, 2008. "Canadian Evidence on the Constructive Capitalization of Operating Leases," Accounting Perspectives, John Wiley & Sons, vol. 7(3), pages 227-256, August.
    16. Hamada, Robert S, 1972. "The Effect of the Firm's Capital Structure on the Systematic Risk of Common Stocks," Journal of Finance, American Finance Association, vol. 27(2), pages 435-452, May.
    17. Christie, Andrew A., 1982. "The stochastic behavior of common stock variances : Value, leverage and interest rate effects," Journal of Financial Economics, Elsevier, vol. 10(4), pages 407-432, December.
    18. Lim, Steve C. & Mann, Steven C. & Mihov, Vassil T., 2017. "Do operating leases expand credit capacity? Evidence from borrowing costs and credit ratings," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 100-114.
    19. Shana M. Clor‐Proell & Laureen A. Maines, 2014. "The Impact of Recognition Versus Disclosure on Financial Information: A Preparer's Perspective," Journal of Accounting Research, Wiley Blackwell, vol. 52(3), pages 671-701, June.
    20. Kaplan, Robert S & Urwitz, Gabriel, 1979. "Statistical Models of Bond Ratings: A Methodological Inquiry," The Journal of Business, University of Chicago Press, vol. 52(2), pages 231-261, April.
    21. Horrigan, Jo, 1966. "Determination Of Long-Term Credit Standing With Financial Ratios," Journal of Accounting Research, Wiley Blackwell, vol. 4, pages 44-62.
    22. Vivien Beattie & Alan Goodacre & Sarah Thomson, 2000. "Recognition versus Disclosure: An Investigation of the Impact on Equity Risk Using UK Operating Lease Disclosures," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 27(9&10), pages 1185-1224.
    23. Kusano, Masaki & Sakuma, Yoshihiro & Tsunogaya, Noriyuki, 2016. "Economic consequences of changes in the lease accounting standard: Evidence from Japan," Journal of Contemporary Accounting and Economics, Elsevier, vol. 12(1), pages 73-88.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alessandro Mechelli & Riccardo Cimini, 2021. "The effect of corporate governance and investor protection environments on the value relevance of new accounting standards: the case of IFRS 9 and IAS 39," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 25(4), pages 1241-1266, December.
    2. Ons Triki & Fathi Abid, 2022. "Contingent convertible lease modeling and credit risk management," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-29, December.
    3. Kusano, Masaki, 2020. "Does recognition versus disclosure affect risk relevance? Evidence from finance leases in Japan," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 38(C).
    4. George-Aurelian Tudor, 2022. "Leasing As A Form Of Financing In Romania. From Theory To Practice," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 3, pages 91-102, June.
    5. Kusano, Masaki, 2023. "Does recognition versus disclosure of pension liabilities affect credit ratings? Evidence from Japan," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 50(C).
    6. Nafiz Fahad & Tom Scott, 2022. "The Impact of Lessee and Lessor Accounting in Local Councils," Australian Accounting Review, CPA Australia, vol. 32(3), pages 388-395, September.
    7. Kusano, Masaki & Sakuma, Yoshihiro, 2019. "Effects of recognition versus disclosure of finance leases on audit fees and costs: Evidence from Japan," Journal of Contemporary Accounting and Economics, Elsevier, vol. 15(1), pages 53-68.
    8. Brasch, Annika & Eierle, Brigitte & Jarvis, Robin, 2022. "Research and development investments, development costs capitalization, and credit ratings: Exploratory evidence from UK R&D-active private firms," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 48(C).
    9. Nafiz Fahad & Tom Scott, 2022. "The Effect of Capitalising Operating Leases On Charities," Australian Accounting Review, CPA Australia, vol. 32(1), pages 141-148, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kusano, Masaki, 2020. "Does recognition versus disclosure affect risk relevance? Evidence from finance leases in Japan," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 38(C).
    2. Kusano, Masaki & Sakuma, Yoshihiro, 2019. "Effects of recognition versus disclosure of finance leases on audit fees and costs: Evidence from Japan," Journal of Contemporary Accounting and Economics, Elsevier, vol. 15(1), pages 53-68.
    3. Hsieh, Su-Jane & Liu, Shuming, 2021. "The cost-of-equity implications of off-balance sheet pension liabilities," Journal of Contemporary Accounting and Economics, Elsevier, vol. 17(1).
    4. Begoña Giner & Francisca Pardo, 2018. "The Value Relevance of Operating Lease Liabilities: Economic Effects of IFRS 16," Australian Accounting Review, CPA Australia, vol. 28(4), pages 496-511, December.
    5. Tommaso Fabi & Enrico Laghi & Marco Mattei & Alessandro Sura, 2014. "Comparing the effects of IASB Proposal on leasing: an impact assessment of EU listed Companies," FINANCIAL REPORTING, FrancoAngeli Editore, vol. 2014(2-3-4), pages 17-57.
    6. Hsieh, Su-Jane & Su, Yuli, 2015. "The economic implications of the earnings impact from lease capitalization," Advances in accounting, Elsevier, vol. 31(1), pages 42-54.
    7. Nafiz Fahad & Tom Scott, 2022. "The Impact of Lessee and Lessor Accounting in Local Councils," Australian Accounting Review, CPA Australia, vol. 32(3), pages 388-395, September.
    8. Nafiz Fahad & Tom Scott, 2022. "The Effect of Capitalising Operating Leases On Charities," Australian Accounting Review, CPA Australia, vol. 32(1), pages 141-148, March.
    9. Diamant, Olga, 2010. "Leasing und bilanzpolitische Motive," Leasing - Wissenschaft & Praxis, Universität zu Köln, Forschungsinstitut für Leasing, vol. 8(2), pages 7-32.
    10. A. Rashad Abdel†Khalik, 1990. "Specification problems with information content of earnings: revisions and rationality of expectations and self†selection bias," Contemporary Accounting Research, John Wiley & Sons, vol. 7(1), pages 142-172, September.
    11. Molina Sánchez, Horacio & Mora Enguídanos, Araceli, 2015. "Cambios conceptuales en la contabilidad de los arrendamientos: retos normativos y académicos," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 18(1), pages 99-113.
    12. Ma, Mark (Shuai) & Thomas, Wayne B., 2023. "Economic consequences of operating lease recognition," Journal of Accounting and Economics, Elsevier, vol. 75(2).
    13. ManYing Kang & Marcel Ausloos, 2017. "An Inverse Problem Study: Credit Risk Ratings as a Determinant of Corporate Governance and Capital Structure in Emerging Markets: Evidence from Chinese Listed Companies," Economies, MDPI, vol. 5(4), pages 1-23, November.
    14. Jennergren, L. Peter, 2011. "Firm Valuation with Operating Leases," SSE/EFI Working Paper Series in Business Administration 2011:3, Stockholm School of Economics, revised 30 May 2011.
    15. Sylvain Durocher, 2008. "Canadian Evidence on the Constructive Capitalization of Operating Leases," Accounting Perspectives, John Wiley & Sons, vol. 7(3), pages 227-256, August.
    16. Florou, Annita & Kosi, Urska & Pope, Peter F., 2017. "Are international accounting standards more credit relevant than domestic standards?," LSE Research Online Documents on Economics 68202, London School of Economics and Political Science, LSE Library.
    17. Kusano, Masaki & Sakuma, Yoshihiro & Tsunogaya, Noriyuki, 2016. "Economic consequences of changes in the lease accounting standard: Evidence from Japan," Journal of Contemporary Accounting and Economics, Elsevier, vol. 12(1), pages 73-88.
    18. Hao, Yamin & Li, Shuo, 2021. "Does firm visibility matter to debtholders? Evidence from credit ratings," Advances in accounting, Elsevier, vol. 52(C).
    19. Annita Florou & Urska Kosi & Peter F. Pope, 2017. "Are international accounting standards more credit relevant than domestic standards?," Accounting and Business Research, Taylor & Francis Journals, vol. 47(1), pages 1-29, January.
    20. Soon‐Yeow Phang, 2020. "Impacts of the timing of the discovery of a subsequent event on the auditors’ approach to subsequent events," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 4121-4146, December.

    More about this item

    Keywords

    Constructive Capitalization; Operating Leases; Risk Relevance; Reliability;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kue:epaper:e-16-016. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Graduate School of Economics Project Center (email available below). General contact details of provider: https://edirc.repec.org/data/fekyojp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.