Comparison of the Value Relevance Between the Purchase and Rental Treatment of Leases

The purpose of this paper is to compare the earnings value relevance between rental and purchase treatments, i.e. to examine whether the capitalization of leases is appropriate in terms of income measurement rather than as recognition on balance sheets. I have chosen to examine a Japanese sample because earnings information in Japan is available both when leases are treated as rentals and when leases are treated as purchases. The results show that the value relevance of earnings-via purchase treatment rather than by rental treatment is significantly higher only in 2003. This might imply that investors utilize footnote information only in particular situations. Although we need further examination of why investors evaluate leases differently only in 2003 and it is important to expand this implication carefully in order to evaluate the relevance of capitalization of operating leases, this paper offers serious implications for the FASB/IASB project