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Did the Recognition of Operating Leases Cause a Decline in Equity Valuations?

We examine whether investors react to a significant change in balance sheets absent a significant change in underlying economics. Beginning in 2019, ASC 842 requires the recognition of operating leases, which were previously only disclosed in the footnotes. This change in accounting standard has no effect on firms' economics but results in firms with significant operating leases recognizing a considerable increase in debt. We find that firms with significant operating leases, on average, earn negative returns around the initial recognition of their operating leases. For example, firms in the top decile of operating lease intensity experience a mean abnormal return of -3.10% around their first quarter 2019 earnings announcements. Our results provide timely, new evidence consistent with equity market prices failing to reflect an adequate level of fundamental analysis.