The Impact of Operating Lease on Firm Financial and Operating Risk.pdfVIP

The Impact of Operating Leases on Firm Financial and Operating Risk DAN DHALIWAL* HYE SEUNG (GRACE) LEE** MONICA NEAMTIU* T h is s t u d y u s e s e x a n t e c o s t - of - e q u it y c a p it a l m e as u r es b a s e d o n accounting valuation models to assess the risk relevance of off - balance sheet operating leases. We investigate whether off - balance sheet operating leases have the same risk - relevance for explaining ex ante measures of risk as a firm’s on - balance sheet capital leases. W e also investigate how investors’ risk perception of ope rating leases has changed in recent years whe n of f - balance sheet transactions in general a nd operating leases in particular have been facing increased regulatory and investor scrutiny. This study finds that a firm’s ex ante cost - of - equity capital is positively associated with adjustments in its financial leverage (financial risk) and operating leverage (operating risk) resulting from capitalized off - balance sheet operating leases and that the positive association between the ex ante cost of capital and the impact of operating leases on a firm’s financial leverage is weaker for the operating leases compared w i t h t h e c a p i t a l l e a s e s . T h i s s t u d y a l s o f i n d s t h a t t h e p o s i t i v e association between the ex ante cost of capital and the impact of operating leases on a f irm ’s f inancial leverage has decreased considerably in recent years, s