IFRS 16 and Corporate Financial Performance in Italy

Lease is defined as a transaction between the owner of a property (lessor), who grants the use of that property to a third party (lessee), for a certain period of time defined in the contract, with the option for the lessee to acquire the good, return or to extend the contract (Niyama and Silva 2013). The legal framework proposes two kinds of lease agreement: the finance lease is usually used for the acquisition of property, plant, and equipment, while the operating lease is usually used to acquire assets for a shorter period of time and, in this case, the lessee simply uses this asset (typically equipment or property) until he gives it away. In this second case, the title related to the asset is not transferred to the lessee during or after the lease period, unlike in the finance lease where the lessee has the control over the asset as all risks and rewards related to the leased asset pass to the lessee (Revsine et al. 2017). The two different kinds of leases present several benefits and drawbacks that will be discussed in depth in the next paragraphs.

The reasons driving companies to use accounting standards are also related to benefits resulting for managers and shareholders. In this regard, Watts and Zimmerman have proposed the Positive Accounting Theory, useful theory to explain the use of accounting standards (Watts and Zimmerman 1978, 1979, 1986). In fact, the authors of the Positive Accounting Theory claim that “management plays a central role in the determination of standards” and “one function of financial reporting is to constrain management to act in the shareholders’ interest,” thereby, this theory became an academic theory which helps in explaining and predicting practices in accounting. This theoretical framework highlighted also how the importance of adopting new and good accounting standards, specifically for large companies, can help to solve classic problems related to the agency theory (i.e., problems related to the difference in interests between shareholders and managers). In this context, Brown (2011) states that “accounting standards are important in a well-developed capital market because they help to resolve a serious agency problem. Insiders (managers) are better informed than outsiders (shareholders) about their firms’ investment opportunities, how hard they, the managers, will work and the perks they will consume and how well the firm is doing overall.” Therefore, uniform accounting and auditing standards are necessary because they are a relatively low-cost solution to a serious agency problem and providing clear and transparent information within the financial statements, allowing the interests of managers to be aligned to those of shareholders. Indeed, the issuance of new accounting standards should take into consideration all of these aspects: better quality information (more accurate, comprehensive, and timely financial statement information); the minor difference in the knowledge of information between small investors and professionals (adverse selection); greater comparability, eliminating many international differences in accounting standards and standardizing reporting formats (Ball 2006; Brown 2011). According to Ball (2006), higher-quality information “should reduce both the risk to all investors from owing shares and the risk to less-informed investors due to adverse selection. In theory, it should lead to a reduction in firms’ cost of equity capital.”

This chapter illustrates the methodology used to develop the empirical analysis and the related results. In line with the existing literature presented in the previous Chap. 3, the empirical analysis has been conducted on three main research lines. The first, related to the definition of the relationship between companies’ determinants (explanatory variables) and the level of lease liability emerging in the financial statement following the adoption of the new IFES 16. The second, relating to the analysis of the impact deriving from the implementation of the new lease accounting model on the financial structure and on economic-financial performance. The third, relating to the investigation conducted on the implementation of the new accounting standard and the reactions of market operators, with a particular focus on market value. As already outlined, the innovativeness of the empirical analysis lies in the adoption of real data extrapolated from the financial statements that incorporate the transition from the previous IAS 17 to the new IFRS 16. The adoption of such data and, at the same time, the effect of the First Time Adoption (FTA) mainly described in the related notes, allow to contribute to the existing literature providing real results on the effect deriving from the implementation of the new lease accounting model.