Debt Contracting and Changes to the Accounting for Leases : Implications of Accounting Standards Codification 842

We examine the performance of new lease accounting rules in private debt markets. Among debt contracts issued before ASC 842 became effective but that end after the effective date, we find 87 percent exclude or provide an option for contracting parties to exclude the effects of ASC 842. We find the choice to exclude the effects of ASC 842 is driven by operating lease obligations, the distance between loan initiation and the effective date of ASC 842, the length of time ASC 842 is effective before maturity, performance pricing, and the inclusion of operating leases in contractual definitions of indebtedness. Also, we provide evidence of a potential one-time wealth redistribution between contracting parties when contracts allow leases to be reclassified as short-term leases and incentivize such behavior. After ASC 842 became effective, we document the introduction of clauses that fix GAAP at dates prior to the contract effective date