Market Perceptions of Lease Liabilities

Abstract

Previous empirical studies have examined market's response to the deliberations surrounding and enactments of lease disclosure regulation and to the information content of the data disclosed as a result of the regulation. Given the empirical evidence that certain financial ratios are used by investors, it is reasonable to hypothesize that investors' assessment of the firm's risk return characteristics would be affected if non-capitalized lease data were made public and incorporated into the investors' evaluation of the firm's market value. However, the literature indicates that the test results are not consistent with each other. While Ro (1978) has found a market reaction to his PV-IE sample (i. e., the firms that disclosed both present values and income effect of lease obligations), no significant market reaction was observed for the PV-only sample (i. e., the firms with present value information only). Finnerty, Fitzsimmons, and Oliver (1980) have found no shifts in the systematic risks surrounding several announcements and concluded that the mandated lease information may have already been known to the market through other available sources. The result of Bowman (1980) also indicates that the information is impounded in the systematic risks of the disclosing firms well in advance (i, e., the required data are incorporated into the predisclosure systematic risks), which is consistent with a strong form of market efficiency.