Compliance with Financial Reporting Standards and Corporate Investment Policies: Evidence from ASC 842
Mr. Doyeon Kim
Ph.D. Candidate in Accounting
Kellogg School of Management
Northwestern University
This study examines the impact of compliance with changes in mandated financial reporting on corporate investment decisions. I employ the recent implementation of ASC 842, which required the capitalization of all operating leases, as a plausible exogenous shock to managers’ information set and conduct a differences-indifferences analysis. Using a novel dataset on machine equipment transactions, I provide four unique insights. First, relative to private firms unaffected by ASC 842, public firms exhibit a significant decline in leased equipment, consistent with ASC 842 reducing over-investment. Second, the post-ASC 842 decrease in leasing activity is more pronounced among public firms with more complex organizational structures where more information asymmetry within the firm existed. Third, following ASC 842, significant characteristics such as machine age, horsepower, and “deployability” change for the equipment acquired through leases and debt, suggesting that managers are able to make more informed financing decisions. Finally, I show that public firms improve investment efficiency as a result of compliance with ASC 842.
