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01-10-2024 | Original Research

Recognition versus disclosure and stock price crash risk: Evidence from IFRS 16 adoption

Authors: Audrey Hsu, Sophia Liu

Published in: Review of Quantitative Finance and Accounting

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Abstract

Motivated by the intention of both the IASB and FASB leading up to the adoption of IFRS 16 (ASC 842), which brings off-balance-sheet (OBS) leases back onto corporate balance sheets, we investigate whether IFRS 16 adoption affects stock price crash risk. Since all leases have to be recognized on the balance sheets after IFRS 16 adoption, we expect that IFRS 16 adoption significantly improves the transparency of information about OBS leases and facilitates financial statement comparability between companies that lease assets and companies that borrow to purchase assets. Both information transparency and statement comparability can constrain managers’ ability to hoard negative news (Haggard et al. Haggard et al., Finan Manag 37:747–768, 2008; Kim et al. Kim et al., J Account Econ 61:294–312, 2016). Therefore, we expect that firms’ stock price crash risk will decrease after IFRS 16 adoption. Using a sample of Taiwan non-financial firms over 2015–2022, we find that firms affected by IFRS 16 adoption experience a decrease in stock price crash risk after the mandatory adoption of IFRS 16. We further find that investors in firms that are less sophisticated in processing OBS lease information and firms with poorer corporate governance experience a greater decrease in stock price crash risk than other firms after IFRS 16 adoption.

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Appendix
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Footnotes
1
A finance lease is a lease that transfers substantially all the risks and rewards incident to ownership to the lessee. The legal title may or may not eventually be transferred [IAS 17.4]. An operating lease is a lease other than a finance lease [17.4]. Essentially, IAS 17 identifies a finance lease when a lease is economically similar to purchasing the asset being leased. Once the lease is classified as a finance lease, underlying assets and liabilities are recognized on the lessee firm’s balance sheet. Similarly, U.S. GAAP classify a lease as a capital lease (equivalent to a finance lease under IFRSs) based on whether the lease arrangement is economically similar to purchasing the underlying asset, except that U.S. GAAP use “bright lines” to classify the lease.
 
2
For example, S&P’s present value method capitalizes the present value of minimum lease payments for five years plus the estimated remaining years in the “thereafter” value. Moody’s multiple method capitalizes operating leases by selecting the higher value between S&P’s and 8 times the current year’s rent expense (Lim et al. 2017).
 
3
A company can choose to adopt IFRS 16 before January, 1, 2019 but only if it also applies IFRS 15 Revenue from.
Contracts with Customers.
 
4
The US Financial Accounting Standards Board (FASB) also issued an equivalent standard in February 2016 (Accounting Standards Update 2016–02, Leases, codified as ASC 842), with the same effective date.
 
5
Under IFRS 16, lessors still classify leases as operating or finance leases depending on whether the risks and reward incidental to ownership of the underlying asset are transferred to the customer, similar to IAS 17.
 
6
Another non-exclusive alternative is that investors’ cognitive biases make them focus more on recognized information. See the discussion in Schipper (2007).
 
7
Some studies investigate a firm’s “lease versus buy (debt) decision” and firm characteristics associated with the use of leases (either finance or operating leases).
 
8
We also estimate the measures of crash risk based on raw residual returns and obtain robust (untabulated) results.
 
9
Specifically, DTURN is calculated as average monthly share turnover for the current firm-year t minus the average monthly share turnover for the previous firm-year t, where the monthly share turnover is computed as the monthly trading volume divided by the total number of shares outstanding during the month.
 
10
As Yoon (2021) defines short-term and variable leases (STVL) as RentExp minus OperLease, we also follow Yoon (2021) to use rental expenses minus one-year-ahead operating lease payments to measure operating short-term leases and variable leases. \(VARlease\) is defined as the sum of rental expenses minus one-year-ahead operating lease payments, discounted by the estimated discount rate for the adoption period in our sample (i.e., 2019-2022). Untabulated results show that our findings are qualitatively similar when we use alternative measure of short-term and variable leases.
 
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Metadata
Title
Recognition versus disclosure and stock price crash risk: Evidence from IFRS 16 adoption
Authors
Audrey Hsu
Sophia Liu
Publication date
01-10-2024
Publisher
Springer US
Published in
Review of Quantitative Finance and Accounting
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-024-01359-0

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