۱- Introduction

۲- Research methods and data

۳- Empirical results

۴- Concluding remarks

References

Abstract

We extend Williamson, 1973, Williamson, 1987 transaction economics research to leased assets to help explain why some assets are acquired by capital lease and the use of other assets is acquired by operating lease. We look for evidence that capital leases are used for higher asset specificity assets and operating leases are used for lower asset specificity assets. Specifically, we find that returns on capital lease assets exceed the returns on operating lease assets. That the nature of capital lease assets differs from operating lease assets suggests that the lease standard SFAS 13 better categorizes assets under lease. The new lease standard ASU 2016-02 allows only one category for lease assets. From this we conclude that ASU 2016-02 will potentially have an adverse effect on the relevance of lease asset accounting.

Introduction

This study involves the relation between the accounting for leased assets and the underlying nature of leased assets. The study begins by linking the lease accounting categories of capital and operating as specified in SFAS 13 to the Williamson (1973, 1987) conceptual framework of asset specificity. In the Williamson framework, lease accounting categories link to asset specificity because firms will tend to acquire assets with greater asset specificity through lease financing arrangements (capital lease assets) and will obtain the use of assets with lower specificity through rental agreements (operating lease assets). We test the lease accounting link to asset specificity with a sample of firms reporting both capital and operating leases with results generally in support. We discuss the implications of the results in the context of a potential loss of relevant information from the adoption of ASU 2016- 02 that requires the capitalization of all non-cancelable long term leases. In particular, the results suggest a potential loss in the relevance of lease asset accounting. The concept of asset specificity is useful in explaining why firms own certain assets but not others (Williamson 1973, 1987). A specialized stamping machine for a firm producing automobile panels is a common Williamson example of a high specificity asset. In the Williamson context, the firm reduces transaction costs by vertically integrating (by constructing and owning) the stamping machine. The stamping machine is idiosyncratic to the firm as it is crucial to the firm’s operations while having little value away from the firm. In contrast, other assets useful to the firm’s operations, such as forklifts, are not firm idiosyncratic but rather have generalizable value across many types of firms. Again in the Williamson context, the firm reduces transaction costs with a market transaction to rent the forklift. Ownership is not a benefit over renting for a firm needing the use of a forklift. It is not controversial that a firm producing automobile panels will be more likely to own the stamping machine and more likely to rent a forklift, all other things being equal. In support, a recent study finds that buildings with higher asset specificity are more likely to be owned and buildings with lower asset specificity are more likely to be leased (Wong, Wong and Jeter 2016). Thus, a firm’s method of obtaining the use of an asset will reflect the idiosyncratic nature of the asset to the firm’s operations.