The effects of leases on company value in the pre- and post-lease capitalization rules period: Evidence from Australia

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Abstract

This study explores the potential impact of the Australian Accounting Standards Board’s (AASB) Accounting Standard for Leases, AASB 16, on firm value using data from 2016 to 2022, which covers three years before and four years after adopting AASB 16. It finds a significant positive association between operating leases and firm value and a significant negative relationship between lease capitalization (right-of-use [ROU] assets) and firm value. This evidence lessens concern over the potential negative consequences of operating lease accounting and raises adverse concerns about the implemented lease standard, AASB 16, which mandates companies to recognize all leases as capitalized (ROU) assets. By using Australian data, the research fills a gap in the current literature by providing insights into the effects of lease accounting rules on a company’s value. Using real data, no previous research has looked at how changes to lease rules affected the firm value for companies before and after AASB 16 was put into place. This study contributes to the existing literature by providing empirical evidence on how the new lease accounting standards impact policymakers, standard setters, investors, creditors, company managers, and academics. The findings of this study will undoubtedly have a significant economic impact on the AASB 16 standard. Given the previous discussion of the possible effects of lease capitalization on how changes in a company’s leverage may impact its capital structure, debt covenants, relative position in the market, and, ultimately, its reputation among investors and users, our findings are particularly pertinent. From a standard-setting perspective, we believe this study is timely and could be beneficial, particularly if the AASB undertakes a post-implementation review of AASB 16.

Keywords: Operating Leases, Lease Capitalization, Right-of-Use Assets, Firm Value, Australia, AASB 16

Authors’ individual contribution: Conceptualization — J.H.D.; Methodology — J.H.D.; Software — J.H.D.; Validation — J.H.D.; Formal Analysis — P.S.; Investigation — P.S.; Resources — P.S.; Data Curation — P.S.; Writing — Original Draft — P.S.; Writing — Review & Editing — J.H.D.; Visualization — J.H.D.; Supervision — J.H.D.; Project Administration — J.H.D.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G32, M41, M48

Received: 03.05.2025
Revised: 11.07.2025; 22.07.2025
Accepted: 25.07.2025
Published online: 29.07.2025

How to cite this paper: Hewa Dulige, J., & Sharma, P. (2025). The effects of leases on company value in the pre- and post-lease capitalization rules period: Evidence from Australia. Corporate Ownership & Control, 22(3), 8–20. https://doi.org/10.22495/cocv22i3art1