Efficiency gains from accounting regulatory compliance

In 2008, the FASB and IASB jointly initiated a project to develop a new standard to account for leases to increase transparency and comparability among reporting entities. The new lease accounting standard (ASC-842) was issued in February 2016. Complying with the standard requires companies to collect and compile lease data in a comprehensive manner. Using the recent lease accounting standard change, I examine whether the process of complying with new accounting standards has positive spillover effects on operating efficiency through managerial learning. To separate managerial learning from the potential benefits of enhanced disclosures, I exploit the relatively long transition period (2017-2018), wherein managers had access to new information related to operating leases that was not disclosed to the market. I find that firms with a high proportion of operating leases experience an increase in profitability and a reduction in operating leases during the transition-period relative to other firms. I document that the results are not driven by substitution to capital leases or the purchase of property, plant and equipment. Additional analyses reveal that the results are concentrated in firms with poor internal information environments and high business complexity. My results support the claim that the information generated through the compliance process can lead to efficiency gains.