Does recognition versus disclosure affect risk relevance? Evidence from finance leases in Japan

This study examines the risk relevance of recognized versus disclosed finance leases in Japan. More specifically, this study investigates whether and why equity investors treat recognized and disclosed finance lease obligations differently when assessing firms equity risk. This study shows that recognized finance leases are associated with equity risk while disclosed finance leases are not. Moreover, the relationships between recognized versus disclosed finance leases and equity risk are substantially different. However, for firms with higher levels of institutional ownership, the risk relevance of disclosed finance leases is similar to the risk relevance of recognized finance leases. These results suggest that institutional investors are more sophisticated at processing disclosed finance leases and treating disclosed and recognized finance leases similarly when assessing firms equity risk. Thus, this study provides evidence that investors information processing has significant effects on the risk relevance of lease arrangements. (c) 2020 Elsevier Inc. All rights reserved.