Journal of Accounting Research Vol. 16, No.

2 Autumn 1978

Printed in U.SA.

The Disclosure of Capitalized Lease Information and Stock Prices

BYUNG T RO*

1. Introduction
This researcb empirically examines whetber tbe recent Securities and Excbange Commission (SEC) decision calling for disclosure of capitalized accounting data for noncapitalized financing leases bad any impact on tbe pricing of securities. The results of tbis researcb may be relevant in evaluating the lease disclosure requirements set forth by tbe Financial Accounting Standards Board, as well as by the SEC. In June 1973, tbe SEC proposed to amend Rule 3-16' of Regulation S-X calling for improved disclosure of lease information by lessees in their 10-K reports filed witb tbe SEC.^ After evaluating many letters of comment received in response to the proposal, tbe SEC eventually adopted tbe extended lease disclosure requirements in Accounting Series Release (ASRJ No. 147 in October 1973.^ The Release was
effective as of November 30, 1973.
" Assistant Professor, Purdue University. This paper is based on my 1976 Ph.D. thesis at Michigan State University. I am grateful to my committee, Ronald M. Marshall (chairman), Daniel W. Collins, and Richard R. Simonds. This research was generously supported by the Haskins & Sells Foundation. I also appreciate comments and suggestions by an anonymous referee and Nicholas J. Gonedes on an earlier version of this paper, and the participants in the accounting workshop at Krannert Graduate School of Management, Purdue University. [Accepted for publication January 1978.] ' Rule 3-16 contains provisions about the disclosure of commitments and contingent liabilities, including lease commitments. ' The Securities and Exchange Commission, Securities Act of 1933, Release No. 5401 (June 6,1973), in SEC Docket (June 19,1973). ' The Securities and Exchange Commission, ASR No. 147, "Notice of Adoption of Admendments to Regulation S-X Requiring Improved Disclosure of Leases" (October 5, 1973), inSECDocket (October 23, 1973.). 315 Copyright O, Inatitute of Professional Accounting 1978

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The Release requires disclosure of certain lease information not previously required by either the SEC or other accounting regulatory agencies. The new items of mandatory disclosure, which concern noncapitalized financing leases, are (1) the present value (PV) of the minimum future lease commitments, (2) the interest rate(s) implicit in computing the PV and (3) the impact on net income (income effect, IE) if such leases were capitalized.* Two reasons for the extended lease disclosure requirements are specifically pointed out in the i?e/ease.^ First, the disclosure of thePV and IE numbers is considered "essential to investors," since this information is felt to be "necessary to enable investors to compare meaningfully the capital and asset structures and the operating results" of the companies that have lease commitments. Second, the existing lease disclosure requirements, including APB Opinion No. 31, are not sufficient to provide lease information "as needed by investors." These statements suggest that the capitalized lease data of the type called for in the Release will convey new information (important to investors) about the risk-return prospects of those firms which did not previously report such data through accounting sources. This suggestion, in turn, implies that the security prices of these firms will be affected by disclosure of such data through its impact on investor's assessments of the risk-return prospects of the firms. The SEC's view on the importance of capitalized lease information is not new. Rather, it can be viewed as a reinforcement of the traditional arguments that support disclosure of capitalized lease information in financial reports. According to these arguments,* lease commitments create property rights (assets) and liabilities on the part of lessees.Consequently, capitalized lease data will convey new information about the risk-return attributes of the lessee firms, and disclosure of such data will improve "the information content of the financial statements" of the lesseefirms.^ There is a counterview which asserts that a lease commitment does not give rise to an asset and a liability of the lessee firm, and that disclosure of capitalized lease data will not improve the information content of the financial statements. As a result, capitalized lease
' For further details of the disclosure requirements, see "C. Amendments to Regulation S-X" of ASR No. 147. ' See "A. Introduction" oiASR No. 147. " Examples of the traditional arguments in support of capitalized lease disclosure include Myers [1962]. Vatter [1966]. Huefner [1970], Buff [1971]. APB Opinion No. 31, the FASB Statement No. 13 (1976) on accounting for leases, and a 1976 report (see n. 7 below) of the Subcommittee on Leases of the AAA Committee on Financial Accounting Standards. ' The Subcommittee on Leases of the AAA Committee on Financial Accounting Standards, "Response to Financial Accounting Standards Board Discussion Memorandum on Accounting for Leases," supplement to The Accountirtg Review (1976): 229.

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317

disclosure will be of little value in evaluating the market value of a disclosing firm, so that the costs of such disclosure may exceed its benefits.* Despite the importance and complexity of the issue of capitalized lease disclosure, surprisingly little research has been undertaken to evaluate this issue empirically. If capitalized lease data convey any new information important to investors, as both the SEC and the proponents of capitalized lease disclosure believe, one can expect to observe a market reaction to the disclosure of the capitalized lease data under ASR No. 147. To tbe extent that the market reaction exists, it is possible to evaluate the information content of the capitalized lease data and the effect of the SEC lease disclosure decision on the pricing of securities. However, if the capitalized lease data do not convey any new information about the risk-return prospects of the firms, as tbe counterview asserts, then there should be no empirically observable market reaction to disclosure of such data. No market reaction implies no information content of the capitalized lease data and this, in turn, implies that the SEC decision had no impact on the pricing of securities. 2. Assessment of Effects of Capitalized Lease Disclosure on Security Prices This section first examines why the disclosure of capitalized lease data, such as the PV and IE numbers, in financial reports may have an effect on the equilibrium pricing of securities, and then discusses the research design used to detect such an effect. The framework of the section, including the selection of the statistical test method, is based on the idea originally introduced by Gonedes [1975] and later used by Gonedes, Dopucb, and Penman [1976] and Harrison [1977].
POSSIBLE EFFECTS OF CAPITALIZED LEASE DISCLOSURE

Suppose that a (lessee) firm capitalizes a financing lease which allows it to use a property under the lease contract for a certain period of time, in return for periodic rental payments. Then the firm does not charge periodic rental expenses to income. Instead, tbe firm will recognize depreciation expense on the leased property and interest expense on the lease payment obligation equal to the present value of
Examples of this counterview include Cook [1963], Zises [1961; 1973], Donaldson [1962], Axelson [1971], Defliese [1973], and Numherg [1973]. The argument claiming no-information-content of capitalized lease data is not necessarily the same as the argument against the disclosure of such data. For example, management may oppose the disclosure of capitalized lease information hecause of the potential that this disclosure would adversely affect the credit standing of their firm. In this case, management assumes that capitalized lease data have information content; but they oppose disclosure of such data because of its potential adverse effect.

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future rental payments. In addition, the firm will report the leased property as an asset and the lease obligation as a liability. In this case, if the amounts of periodic rental payments are not the same as the amounts of periodic depreciation and interest expenses, which is very likely, different periodic net income will result. Thus certain income-statement-related financial ratios, including operating risk measure, would be affected if the results of lease capitalization were incorporated into computing such ratios. Similarly, certain balance-sheet-related financial ratios, such as financial risk measure, would also change if the leased asset and the lease liability were included in calculating such ratios. It appears, therefore, that investors' assessments of the firm's riskreturn characteristics, including operating and financial risks, would be affected if capitalized lease data were made public. The reason is that certain financial ratios incorporating the result of lease capitalization might have been used by investors in evaluating the risk-return characteristics of the firm. As a result, the effect of capitalized lease disclosure on the assessments by investors may lead to different evaluation of the firm's market value.^ The discussion above seems to be typical of firms which have noncapitalized financing leases. The SEC's assertion that the disclosure ofPV and IE numbers under ASi? No. 147 is essential to investors implies that investors would form different assessments of the riskreturn characteristics of the firms with noncapitalized financing leases, if such numbers were available to them. Therefore, their investment decisions conditional upon the capitalized lease numbers would differ from investment decisions that would otherwise be formed. Different investment decisions by investors would then allow for the possibility that different equilibrium security prices may result.
ASSESSMENT OF EFFECTS WITH CONTROL BY MATCHING

If equilibrium security prices were affected by capitalized lease disclosure, one would expect to observe the following condition: RIO i= R where R and 6 are column vectors of rates of return and capitalized lease numbers, respectively. However, it is impossible to observe the two types of return data for a firm for a given time period. To approach this problem, a group of control firms were employed.
^ The results of previous studies suggest that certain financial ratios are highly associated with firms' market values, implying that such ratios might have been used by investors in making investment decisions. Lev [1974] demonstrates how the firm's operating risk can affect its market value. On the other hand, Hamada [1972] shows how the firm's financial risk is related to its market value. In addition, Beaver, Kettler, and Scholes [1970] found that accounting risk measures are highly associated with market risk measures. Thus it seems reasonable to cor^jecture that capitalized lease data may have a relationship with firms' market values through their impacts on financial ratios.

CAPITALIZED LEASE INFORMATION . J^pltillxed Honcancelablef leases / \ \ Voncfcpltallzed; HOnc.px^ai.i.*c<i. Ito noncancelable (but lease 8 (but leases) cancelable -JteterUl -Jtet rinanclng' /leasea \ Dmnaterlal eratlng and \Ope other'leases oth

319 Group 2

Croup 1 leases FIG. 1. Lease cleissification and grouping of firms.

The control group (group 1, denoted by C) consisted of firms which did not have to report on noncapitalized leases for 1973 and 1974, because they had no noncancelable leases'" during the period and hence, were not affected by the SEC lease disclosure decision (see fig, 1), In ASR No. 147, the SEC requires a firm to disclose the minimum rental commitments under all its noncancelable leases," Since this disclosure for noncancelable leases was (and is) mandatory, it was possible to identify whether a firm had such leases during the time period by reference to its 10-K reports. Also, the control firms did not report annual total rental expenses, because the amount of total rental expense failed to exceed 1 percent of consolidated revenue,'^ Treatment firms (group 2, denoted by T) were those firms which reported the PV and/or IE numbers of noncapitalized financing leases in their 10-K reports of 1973 and 1974 according to the Release.^^
'" The Release uses the definition of a noncancelable lease provided in APB Opinion No. 31. The Opinion defines a noncancelable lease as one that has an initial or remaining term of one year and is not cancelable, or is cancelable only upon the occurrence of some remote contigency or upon the payment of a substantial penalty. (See note 2, para. 9 of the Opinion and ASR No. 147.) " See "C. Amendments to Regulation S-X" oiASR No. 147. " According to ASR No. 147, the disclosure of total rental expenses and minimum rental commitments under all noncancelable leases is required only if gross rental expense in the most recent fiscal year exeeds 1 percent of consolidated revenues. (See "C. Amendments to Regulation S-X" of ASi? No. 147.) '^ No firm examined was found to have reported \heIE numbers alone. In ASi? No. 147, the SEC provides two guidelines (materiality criteria) for disclosure of the PV and IE numbers: 5 percent for the PV disclosure and 3 percent for the IE disclosure. If the magnitude ofPV (or IE) exceeds 5 percent of long-term capitalization (or 3 percent of average net income for the most recent three years), then the disclosure of PV {or IE) numbers is required in the sense that the numbers are material. In calculating average net income, loss years are excluded. If losses were incurred in each of the most recent three years, the average loss should be used for testing the materiality of the IE numbers, (See "7. Materiality" of ASR No. 147.) Based upon the above criteria, the firms whose PV (or IE) numbers of noncapitalized financing leases were reported to be immaterial, as defined by the SEC, were excluded from both treatment and control groups. Thus, the treatment firms were only those which reported the PV numbers (or thePV and IE numbers) that were material.

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Further criteria used to select both treatment and control firms are provided later. To control for confounding factors whicb might conceal possible effects of capitalized lease disclosure under investigation, treatment and control firms were individually matched, primarily according to tbe estimates of their relative risks (betas)," assuming that the wellknown capital asset pricing model (CAPM) holds.'^ Tbe beta estimates ()8's) were available from Security Risk Evaluation (September 1973) publisbed by Merrill Lynch, Pierce, Fenner and Smith Inc. The published /3's were estimated, via tbe market model,' as of August 1973'^ using sixty prior monthly returns. In equating tbe beta estimates, it was assumed tbat fir = Pc at tbe individual firm level, prior to the SEC lease decision, leads to PT = Pc at tbe group level as well. A matcbed pair design of tbis type was assumed to be effective te reduce tbe undesirable effect of regression phenomenon involved in estimating /3's. (See Harrison [1977].) In matching firms individually, an attempt was made to consider industry factors as well. However, tbe result of tbis consideration turned out to be not as successful as it was intended (see Appendix A). Tbe main reason was tbat tbe relatively strict definition of control
''' The reason for using the relative risk as an attribute, as Gonedes and Dopuch [1974] and Gonedes [1975] note, is based on the fact that classifjdng firms according to their relative risks is appropriate in investigating the effect of new information on the values of firms, because this attribute is generally determined by firms' productioninvestment and financing decisions. A theoretical discussion about how the relative risk is related to firms' production-investment and financing decisions is found in Fama and Miller [1972, chap. 7] and Hamada [1972]. '-' E{R\El.Rz),E{Ru), p) = E(R,)I + [{RM) - E(R,)]p where (i?z) = expected return on a zero beta asset with Cov (R^ Ry = 0. / = an n-component unit column vector. E{Ru) = expected return on the market portfolio which consists of all securities in the market. /3 = an n-component column vector defined by Cov (R RyyWai (fiu) which measures the relative risks of the individual assets. '* The market model is given by: where aj, ft = regression coefficients. R.M = return on the market portfolio. ij = error term with(j) = 0 and Cov iit^i) = 0 for i ^j. ' August 1973 was about two months after the publication of the ASR No. 147 proposal. Therefore, the beta estimates used in matching the firms might already have been contaminated by anticipatory market reaction to the proposal. However, it was believed that the inclusion of only two months (after the proposal) in the sixty-month beta estimation period would not be very critical. Also, it was assumed that going back beyond August 1973 might pick up more noise factors which could make it difficult to investigate the unique effect of the SEC decision upon the pricing of securities.

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321

firms, as defined before, led to an insufficient number of potential control firms. '* Based on the matched pair design, a (column) vector of monthly return differences were computed as follows: (1) The return differences were then used in investigating the possible effects of capitalized lease disclosure. Note that the effects were investigated by focusing on total return, rather than any particular return component. In order to examine whether the effects of capitalized lease disclosure did vary according to different levels of riskiness of firms," firms in each group were classified into two different risk groups, high and low, using the relative risk as an attribute.^" After the risk groups were constructed, a two-component return (column) vector {R" R'-) was computed by taking the arithmetic (equally weighted) average of the component individual return differences in each of the two risk groups. Each monthly average return difference was then used as a sample unit.^' The two-component return difference vectors can be expressed as:
'* The reason for giving some consideration to the SIC code was based on King's [1966] finding that about 10 percent of the variance in returns could be explained by an industry factor. However. Fertuck [1975, p. 847] found this to be true only for certain industries: "In some industries, the industry effect is trivial and can be safely ign^ored. In others, it can be as large as a third of the market effect." The implication of this statement is that the industry effect exists in some industries, but it is not as imjiortant as the market effect. Based upon this evidence, the industry classification was ignored in favor of the general market effect when there was a conflict between the matching of firms on the SIC code and the matching of firms on /3j. " Gonedes [1975] argues that the distributions of returns on different types of assets may be affected differently by the same source of information. '" The classification of firms into two risk levels was a simplification; however, it was believed that the tests with the two risk levels would be sufficient to detect any riskdependence of lease disclosure effects. It was also assumed that further classification of firms by risk levels would not be desirable because of the relatively small sample size. " It was asumed that monthly average returns were independent over time, implying that returns (R" and.R'') were identically distributed in every month. This independence assumption may be questioned, since the behavior of returns in different months (for example, March and September) may not be the same. (For empirical evidence on different behavior of returns in different months, see Beaver [1968. p. 41].) However, because of the features of the matched pair design between the treatment and control firms which had the same fiscal year-end with the same disclosure month, an impact on the test results of a possible violation against the independence assumption could be considerably reduced. Therefore, the test results here would not be critically distorted. In an effort to evaluate whether the distribution of return differences in different months were identical, the Kolmogorov-Smirnov normality test was conducted for each month. January 1973 through September 1974. The results suggest that the distributions of monthly return differences did not significantly differ in different months over the twenty-one-month test period.

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The distribution of return differences computed above, as well as the related raw rates of return, was assumed to be multivariate normal.
TESTING HYPOTHESIS AND EVALUATION METHOD

Based upon the matched pair design, along with the normality assumption, the main concern was whether the mean value of return differences was equal to zero. Thus the null hypothesis was set up in the following form:

where fxa is the population mean of return differences. Given the null hypothesis, one may use a univariate test method to see if each of the component (high and low) mean return differences is equal to zero. However, one problem with a univariate approach is that the joint level of significance (or confidence interval) which is desired cannot be determined exactly by the repeated use of a univariate test for each component. In order to ensure a desired joint level of significance, one needs a multivariate test method which simultaneously examines the equality of all the component mean differences to zero.^^ Moreover, a multivariate approach is consistent with the multivariate normality assumption which was introduced earlier. The null hypothesis was tested by using Hotelling's [1931] T^ statistic,^^ the form of which is given by:

(3) |/| SJ)-1

where d = the sample mean of return differences. t(W) = W^d/V(W^SdW)/iV which is the standard f-test statistic incorporating a weight (column) vector = the 2 x 2 covariance matrix defined as
^^ For further discussions ahout the joint level of significance in a multivariate context, with an example, see Bolch and Huang [1974, pp. 76-77]. " This r statistic was previously used for accounting research by Gonedes [1975] and Harrison [1977], for example. In particular, the former provides a good discussion ahout advantages of using the T' statistic in investigating an effect of accounting information on the pricing of securities.

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323

Group

Subgroups

Level

Number of Matched Pairs 30 30

Group 2 20 L
FIG. 2. Grouping of firms.

19

"I

I " = '< = "determinant."

As noted above, the T^ statistic is essentially the squared standard tstatistic based on a weight vector which maximizes the value of the squared f-statistic.^* And this maximized value oft^ is equivalent to the value of T^ Thus, except for the distinction of the maximization, the multivariate T"^ statistic is similar to the standard univariate tstatistic.^^ When the null hypothesis is true, the T^ statistic has the following F distribution withp (=2, H andL, for example) andiV - p degrees of freedom:

If the F value computed as above exceeds a critical value, the null hypothesis is rejected.
GROUPING OF FIRMS FOR TEST

In conducting the statistical tests, the above null hypothesis was further specified on the basis of the groups of firms formed in two steps. Depending on the type of capitalized lease disclosure, the firms in group 2 were first divided into two subgroups: the PV disclosure firms and the PV-IE disclosure firms. Each of the two subgroups was then broken down into two risk classes, high and low, according to their j8's, as explained before. The firms in group 1 were also classified into corresponding subgroups based on their original matching with the firms in group 2 (see fig. 2).
" See Morrison [1976, pp. 129-31] for the theoretical derivation of the T^ statistic from the univariate ^-statistic using a weight vector. " Also, as in the case of the univariate t-test, the multivariate T^ test is known to be robust against violations of the normality assumption. (See Harris [1975, pp. 7, 87].)

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With the groups formed, an overall test was first conducted combining the PV and PV-IE groups into a single analysis. The ovei*all null hypothesis for this test can be expressed in terms of a four-element mean return difference vector, the elements consisting of PV-H, PV-L, PVIE-H, and PVIE-L, with a related 4 x 4 covariance matrix. However, the results of the overall test would not reveal what effect (if any) the disclosure of the PV numbers alone had on the pricing of securities and whether there was any joint effect of disclosing bothPV and IE numbers at the same time. In addition, the result would not show which component (high or low) of the mean return vector for the PV group (or the PV-IE group) primarily contributed to a rejection of the overall null hypothesis. In order to address these issues, separate tests by subgroups and by risk levels were undertaken as a second step of the analysis. For the purpose of examining any risk-dependence of lease disclosure effect, three different values of the weight vector were employed: the weights (W,) implicit in computing the value of T^, W2 = [1 0]^ for the highrisk group, and W3 = [0 1]^ for the low-risk group. The weight vector W2 was employed to determine if the high-risk mean return difference was significantly different from zero, while the weight vector W3 was used to investigate if the low-risk mean return difference was significant, ^'^
TEST PERIODS

The following events took place during the course of the SEC lease disclosure decision: (1) the publication of the ASR No. 147 proposal; (2) the adoption of the proposal; (3) the effective date of the Release; and (4) the first public disclosure of the actual PV and IE numbers by individual firms according to the Release. A twenty-one-month test period (1/73-9/74) was adopted to investigate possible market reactions to these events. This period runs from six months before the first event (June 1973) to six months after the last event (March 1974),^^^ In an effort to identify more precisely when
^ According to Gonedes [1975], a value of the weight vector can be viewed as the ^ proportions of investments in different types of assets. For example, the wei^t vector W2 implies the hypothetical situation in which one places his entire investment in the high-risk securities. Likewise, W3 implies an entire investment in the low-risk securities. " The data collection showed that about 95 percent of the sample firms filed their 10K reports (containing the PV and IE numbers) with the SEC during March every year from 1973 through 1975. Therefore, it seemed appropriate to use March 1974 as the critical month in which the PV and IE information was publicly disclosed for the first time under ASR No. 147. The choice of a critical time point for the evaluation of an information effect is not consistent in several studies. For example, Gonedes [1975] used the actual disclosure month (March for the firms with the December 31 fiscal year-end) as a critical month. On the other hand. Sunder [1973] used the end of accounting period as a critical time point in assessing an effect of annual earnings announcement, rather than the date of the formal announcement of the earnings.

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325

the most intensive market reaction took place, tbe twenty-one-montb period was divided into five subperiods on tbe basis of tbe critical events. However, tbe effective date (November 30, 1973) of ASR No. 147 was deleted from consideration on tbe grounds that there might be little to differentiate it from tbe adoption date, in terms of potential significance to investors. Botb tbe events and tbe selected test periods are summarized in figure 3. All statistical tests, including tbe overall test, were conducted for eacb of the six different test periods.
3. Data Collection
DISCLOSURE FIRMS

Tbe disclosure firms (group 2) did report tbe capitalized data of noncapitalized financing leases in tbeir 10-K reports according to ASi? No. 147 for 1973 and 1974. In addition, tbey met the following selection criteria. (1) Firms must be registered on tbe New York Stock Exchange (NYSE). (2) No capitalized lease data were reported on the 10K or tbe annual reports prior to ASi? No. 147 (3) Fiscal year must end December 31. Tbese criteria were checked by reading tbe 10-K and the annual reports for the three years, 1972 through 1974. Table 1 provides the statistics of tbe PV and IE ratios as defined in the Release. Several interesting points appear. First, tbe mean of tbe PV ratios {PV/L-TC) in each year is much greater for tbe PV-IE firms than for the PV firms. Note tbat tbe former firms also had lsirger IE ratios (IE/ANI) tban tbe latter firms, wbose IE numbers were not disclosed because of the immateriality of such numbers. The greater PV and IE ratios imply a greater potential impact on financial ratios, suggesting that the SEC decision might have affected tbe security prices of the PV-IE firms more tban tbe security prices of the PV firms. Second, tbe mean and tbe standard deviation of tbe PV ratios are far greater for tbe low-risk group of tbe PV-IE firms than for tbe corresponding high-risk group, altbougb tbis is not true for tbe PV
Ancounceoent of the propowl 1773 IPX: XP 2: tP 3: Jun 1573 I Adoption of the proposal Oct 1973 Effective date Uov 1973 First disclosure Mar 197' 3ep|197lt

31 months 16 oonths 12 months 9 oontht

ih months I. 6t FIG. 3. -TeBt periods based on critical events.

7 asntbs

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CAPITALIZED LEASE INFORMATION

327

firms. This would indicate that the low-risk PV-IE firms' financial ratios were affected to a greater extent by the capitalized lease disclosure than the same financial ratios of tbe high-risk PV-IE firms were. As a result, there is the possibility that the security prices of the low-risk PV-IE firms were more affected by the SEC decision than were the security prices of the high-risk PV-IE firms, if tbe effect of the PV disclosure was significant and dominant over the effect of/ disclosure. Finally, the directions of changes in the two ratios, PV andlE, are highly consistent. Except for one firm, all bad positive changes in tbe PV ratios, while most of the PV-IE firms revealed negative changes in the IE ratios. It should be noted, however, that such consistent directional changes in these ratios might not necessarily have caused similar directional changes in the behavior of security returns.^*
NONLEASE FIRMS

The nonlease firms (group 1) were those which had no noncancelable leases for 1973 and 1974, and which met tbe same three criteria used in selecting the disclosure firms. Information on these firms was obtained from footnotes on leases and sucb sections as "Summary of Significant Accounting Policies" and "Supplementary Income Statement Information" in the 10-K and annual reports of 1972 through 1974. As indicated earlier, each firm in group 1 was paired with every firm in group 2 on tbe basis of )3's. Table 2 gives the statistics that were calculated using the individual /3's provided in Appendix B. Note that between tbe two groups, tbe mean values (1.366 and 1.328) of )8's are fairly equal. The variances (.105 and .092) associated with these mean betas are relatively small. Tbe approximate equality of tbe means (and variances) of j8's between tbe two groups was maintained even when each of the two groups was divided into two subgroups by the type of lease disclosure and then into the two risk groups. Note also that tbe PV-IE firms tended to have higher mean and variance of ^'s relative to the PV firms. The results of the matching suggest that the purpose of matching firms was reasonably achieved, in the sense that the treatment and
" The reason is that, as Nelson [1963] found, some financial ratios (for example, net " profits to net working capital and return on total capital) were not negatively correlated with the capitalized amount of lease commitments. Furthermore, as Beaver et al. [1970] noted, the financial ratios, such as earnings variability, leverage, and growth, vary in the same direction as the relative risks, while other financial ratios, such as payout, size, and liquidity, change in the opposite direction. These two-way directional changes imply that a larger PV (or IE) may have hoth larger positive and negative effects on the financial ratios at the same time. Therefore, the final direction of the net effect upon the distribution of returns may differ, depending upon which financial ratio(s) investors use in making their investment decisions.

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BYUNG T. RO TABLE 2 Statistics of Beta Estimates Used for Matching Overall Group 2 Group 1 PV 1^09 (1.535) (1.082) .077 ( .035) ( .016) 60 (30) (30) Group 2 PV-IE 1^4153 (1.755) (1.135) .139 ( .049) ( .034) 39 (20) (19) PV 1^276 (1.477) (1.075) .059 ( .022) ( .015) 60 (30) (30) Group 1 PV-IE 1^409 (1.678) (1.126) .134 ( .083) ( .029) 39 (20) (19)

Mean 1^366 1^328 (H)* (L) Variance 105 .092 iH) (L) Number of/3 99 99 (H) (L) * H = High risk, andL = Low risk.

control firms were in the homogeneous risk class and had the same first moments of return distributions during the pretest (beta estimation) period. In an effort to evaluate this fact, a separate statistical test was conducted for the period of one year (1972) selected as part of the pretest period. The results from this test suggest that there was no statistically significant difference in mean return vectors between the two groups offirms.^ ^
SECURITY RETURN DATA

Monthly returns, used as a stock price variable, were the continuously compounded rates of return computed as:
(5)

where P and D denote stock price and dividend, respectively. All raw return data (before continuously compounded by means of equation (5) above) were obtained from a 1975 edition of the CRSP tapes. 4. Analysis of Test Results According to the test results discussed in detail below, it appears that the lease information effects, measured by changes in the conditional expected returns for the lease disclosure firms, did exist. However, evidence for the information effects was present only for the PV-IE disclosure firms, and not for the firms which disclosed the PV numbers alone. Table 3 provides a summary of the results of the overall tests for the six test periods which were conducted by combining the PV and PVIE firms into a single analysis. The results of the detailed tests are presented in tables 4 and 5.
For further details of this test, see Ro [1976].

CAPITALIZED LEASE INFORMATION RESULTS OF OVERALL TESTS

329

The T" values in table 3 were calculated using equation (3), while the F-values were computed according to equation (4), The computed Fvalues for all test periods, except for TP4, were significant at the ,10 level. Therefore, the null hypothesis of no return difference between the lease disclosure firms and the nonlease firms can be rejected at the level of significance for each of those five test periods, including the entire twenty-one-month period. The fact that theF-value (2,020) for TP4 turned out to be insignificant is somewhat surprising. It may be that the lack of significance for this period was simply attributable to a sampling variability which could be expected under tiie null hypothesis with a chance of 10 out of 100, The interpretation would be reasonable, since the period (TP4) covered the event of the first public disclosure of the PV and IE numbers under ASR No. 147, the event which was presumably most important for the lease disclosure. Moreover, the test result for TP6, which was not only a subperiod of TP4, but also covered the same disclosure event, turned out to be significant. Despite the ambiguous implication of the test result for TP4, the overall test results strongly suggest that there was significant difference in return behavior between the firms which disclosed their capitalized lease information as required by the SEC and the firms which did not have leases to be capitalized. As indicated earlier, however, the results of the overall tests do not reveal which group (PV or PV-IE) and/or which risk class (high or low) primarily contributed to the rejection of the overall null hypothesis. Some insights into this issue are obtained from the results of additional tests described below.
TABLE 3 Results of Overall Tests
Months r' Value 11.384 12.836 17.347 12.928 16,169 47.992 Computed F-Value' 2.419* 2.567* 3.154* 2.020 3,109* 5.999*

TPl: 21 TP2: 16 TP3: 12 TP4: 9 TP5: 14 TP6: 7

* Significant at the . 10 level. Degrees of freedom for the F-values are (4,17) for TPl, (4, 12) for TP2, (4, 8) for TP3, (4, 5) for TP4, (4, 10) for TP6, and (4, 3) for TP6. Selected fractiles of theF-distribution and the exact F-values are: d.f. Fractiles F-Value d.f Fractiles (4.17) (4.12) (4.10) .900 .950 .900 .950 .900 .950 2.31 2.96 2.48 3.26 2.61 3.48 (4.8) (4.5) (4.3) .900 .950 .900 .950 .900 .950 F-Value 2.81 3.84 3.52 5.19 5.34 9.12

330

BYUNG T. R O TABLE 4
Test Results for PV Firms Average Return Difference
7-2

Momths

High -.0059 (.0159)'-

Low -.0035 (.0222)'' 3.357 2.847 .515 3.050 2.248 .765 7.023 7.019 .466 5.663 4.829 .572 .852 .449 .422 4.848

Computed F-Value" 1.595 1.352 .245 1.423 1.049 .357 3.192* 3.191* .212 2.477 2.113 .250 .393 .207 .195 2.020

Weights High .767 1 0 .728 1 0 1.013 1 0 .801 1 0 .600 1 0 .911 Low .233 0 1 .272 0 1 -.013 0 1 .199 0 1 .400 0 1 .089

TPl:

21 21 21 16 16 16 12 12 12 9 9 9 14 14 14 7

TP2:

-.0058 (.0155)

-.0054 (.0246)

TP3:

-.0102 (.0133)

-.0047 (.0240)

TP4:

-.0095 (.0131)

-.0054 (.0213)

TP5:

-.0029 (.0164)

-.0041 (.0238)

TP6:

-.0117 (.0142)

-.0022 (.0204)

1 0 4.753 1.981 7 1 .080 .033 0 7 * Significant at the .10 level. " Degrees offreedomfor theF-values are (2, 19) for TPl, (2, 14) for TP2, (2, 10) for TP3, (2, 7) for TP4, (2, 12) for TP5, and (2, 5) for TP6. " The first line of the weight vector column in each test period stands for the implicit weights (implicit in computing the value ofT^). " Standard deviation. Selected fractiles of the /"-distribution and the exact F-values are: d.f. Fractiles F-Value d.f Fractiles
(2, 19) (2, 14) (2, 12) .900 .950 .900 .950 .900 .950 2.61 3.52 2.73 3.74 2.81 3.88 (2, 10) (2, 7) (2, 5) .900 .950 .900 .950 .900 .950

F-Value
2.92 4.10 3.26 4.74 3.78 5.79

TEST RESULTS FOR PV DISCLOSURE FIRMS

For the PV firms, tbe means of return differences {RT" Re'' example), computed over tbe number of montbs in eacb of tbe test periods, are shown in columns 2 and 3 of table 4 by the risk classes. Along witb tbe average return differences, tbe associated standard deviations of return differences are indicated in parentbeses. Tbe values of r^ in column 4 were computed using equation (3) witb tbe different weigbt vectors shown in columns 6 and 7.'" The computed F-values are given in column 5.
^ The weights in the first line of the weight vector columns for each test period are the implicit weights that maximize the value of t* and thus that give the maximum

CAPITALIZED LEASE INFORMATION

331

A glance at the F-value column reveals that the only test period yielding the significant F-value (3.192) at the .10 level is the twelvemonth period {TP3), October 1973 (the month in which the SEC decision was formally announced) through September 1974 (six months after the first public disclosure of the PV and IE numbers). Moreover, the significant F-value for the period is shown to be primarily attributable to the high-risk firms in group 2 (see the observed F-value (3.191)). However, the failure to reject the null hypothesis for the other test periods, including the entire twenty-one-month period, casts doubt on the implication of the test result for the twelve-month period. Since the null hypothesis for the overall period was not rejected, it seems reasonable to assume that the result for the twelve-month period turned out to be significant by chance. This assumption is consistent with the implication of figure 4, wherein none of the CARD curves tends to deviate substantially from the horizontal zero return line.^' To summarize, evidence from the test results for the PV disclosure firms suggests that the disclosure of capitalized lease information as required by the SEC had no significant effect upon the pricing of securities. This implies that the PV numbers of noncapitalized financing leases, as disclosed under ASR No. 147, did not carry new information to investors for assessing the risk-return attributes of firms with such leases. There exists evidence (especially the average return differences for TP3 and TP6) for some degree of market reaction to the announcement of the SEC lease decision and the disclosure of the PV numbers. However, the degree of the market reaction was not sufficient to lead to the conclusion that the SEC decision affected the pricing of securities significantly. The above finding appears to imply that the balance sheet effect of lease capitalization (including the effect of changes in leverage ratios)
values of the T^ and F-statistic. All values of T^ and F associated with other weight vectors should be less than or equal to the values of T^ and F related to the implicit weight vector. Notice that this is true for all test periods, as seen in table 4. " The overall CARD curve was constructed using eq. (4-2) and the CARD curves by different risks groups using eq. (4-4) below:
14-1)

CARD,= 25,
(-1

(4-2)

where n = total number of firms (60 for the PV firms and 39 for the PV-IE firms) t = a month, from January 1973 through September 1974
(4-3)

where G = the high- and low-risk group.

332

BYUNG T. RO

TABLE 5
Test Results for PV-IE Firms
Average Return DifTerence
Mr inths
IVIU

High -.0180 ( .0329)

Low
-.0065 ( .0316) 6.378 6.268 .876 7.081 6.445 .021 8.192 6.111 1.531 5.173 3.048 2.227 7.074 1.799 6.992 11.768 9.195 1.714

Computed F-Value 3.030* 2.978* .416 3.304* 3.007* .010 3.724* 2.778 .696 2.263 1.334 .975 3.265* .830 3.227* 4.903* 3.832* .714

Weights High .872 Low .128

TPl:

21 21 21

1 0
1.412

0 1
-.412

TP2: 16
16 16 12 12 12 9 9 9 14 14 14 7 7 7

-.0186 ( .0294)

.0011 ( .0302)

1 0
2.356 1

0 1
-1.356

TP3:

-.0194 ( .0272)

.0094 ( .0265)

0
10.704

0 1
-9.704

TP4:

-.0177 ( .0305)

.0142 ( .0285)

0
-.095 1 0 1.610 1 0

0 1
1.095

TP5:

-.0130 ( .0362)

-.0178 ( .0251)

0 1
-.610

TP6:

-.0280 ( .0244)

.0161 ( .0326)

0 1

* Significant at the .10 level.

on security prices may not be as great as has generally been believed. Alternatively, it seems that information conveyed by the PV numbers released under ASR No. 147 might already have been impounded in security prices through nonaccounting sources, even prior to the SEC extended lease disclosure decision of 1973. This explanation is probably reasonable, provided that lease capitalization generally affects the firms' leverage ratios. It also appears to be consistent with what Hamada [1972] proved conceptually and empirically. He proved that there is a relationship between the firms' leverage profiles and their relative risks.
TEST RESULTS FOR PV AND IE DISCLOSURE FIRMS

The test results for the PV-IE disclosure firms are summarized in table 5. Unlike the case of tbe PV firms, evidence for the existence of lease information effects is striking for the firms which disclosed both P V and IE numbers. Tbe test results for all periods, except for the ninemonth period (TP4), were found to be significant at the .10 level. The above finding is supported not only by the magnitudes of average return differences in columns 2 and 3, but also by the CARD curves in

CAPITALIZED LEASE INFORMATION

333

CARD

All

I 1I

I r I

I I

Jan Jun Oct Mar 1973 1973 1973 197'*

CARD

Sept

low

-High

High

I I

I I t

I I

Jan J u n Oct 1973 1 9 7 3 1 9 7 3

Kar 197'*-

Sept 197'*

FIG. 4.Cumulative average return difference: PV firms. All = all firms; High high-risk firms; Low = low-risk firms.

figure 5. The absolute values of average return differences for the PVIE firms tend to be much greater than those for the PV firms. In addition, the above finding is also consistent with the implications of the PV and IE ratios (see table 1). The mean values of both PV and IE ratios for the PV-IE firms were shown to be far greater than the mean values of the same ratios for the PV firms.^* Both the overall CARD curve and the CARD curves for the two risk groups deviate substantially from the horizontal zero line during almost the entire twenty-one-month period. The major declines or changes in these curves began to take place in approximately March 1973 and around the time (March 1974) of the PV and IE disclosure in the 10-K reports. It seems, therefore, that the market reaction to the SEC
^' Note that thePV firms also had the/ numbers of noncapitalized financing leases, although these numbers were not publicly disclosed because of their immateriality as defined by the SEC.

334

BYUNG T, RO CARD

AU

LL

Jan 1973

Jun Oct 1973 1973

Mar 197^

Sept 197*

CARD

M 1 1 1 ' Jan )an

1973

Jun Ocz 1973 1973

FIG. 5. Cumulative average return difference: PV and/ firms.

decision was initiated about three months prior to the publication of the ASR No. 147 proposal. Moreover, there was a further market reaction upon the disclosure of the actual P V and IE numbers. The above findings, coupled with the results in table 4, suggest that the joint effect of both PV and IE disclosure upon security prices was significant, and much more so than the singular effect of PV disclosure alone. Evidence from table 5 also indicates that the extent to which security prices were affected by the SEC decision was not the same for the firms in different risk classes. The observed F-values of the highrisk group associated with the weight vector [1 0] for all test periods, except for the fourteen-month period, are greater than the observed Fvalues of the low-risk group associated with [0 1], It appears, therefore, that the security prices of the high-risk PV-IE firms tended to be more sensitive to the events of the SEC decision than did the security prices of the low-risk PV-/F firms. The tendency of risk-dependence of the lease information effects is supported by the lower graph in figure 5, The CARD curve for the high-

CAPITALIZED LEASE INFORMATION

335

risk group shows a downward deviation from the horizontal zero line over almost the entire twenty-one-montb period, while the CARD curve for tbe low-risk group starts down but tben turns up in tbe second balf of tbe period. Tbis caused a reversal of tbe two curves, higb and low, around March 1974. The interesting behavior shows up also in tbe larger magnitude of average return difference (- .0178) for tbe low-risk group for TP5 (the fourteen-month period), and in tbe significant Fvalue (3.227) associated witb tbe weigbt vector [0 1]. However, it appears that the relatively larger deviation of tbe low-risk CARD curve from the zero return line during tbe fourteen-month period and its subsequent upward cbange around Marcb 1974 may merely be caused by a sampling variability, since, by definition, tbe bigb-risk firms must be riskier tban tbe low-risk firms. Therefore, it is not likely tbat tbe latter firms were, in fact, more adversely affected by tbe capitalized lease disclosure tban the former firms.^^ To summarize, tbe test results for the PV-IE firms suggest tbat the information effects of the various events of tbe SEC lease decision were present when the effects were measured by tbe changes in the expected values of return distributions. The results also reveal tbat tbe market reaction began as early as Marcb 1973, indicating that tbe effects of tbe capitalized lease disclosure (as required by tbe SEC) were anticipated
' ' An alternative explanation may be possible-that the security prices of the lowrisk PV-IE firms, relative to those of the high-risk PV-IE firms, were in fact more adversely iffected by the predisclosure events of the SEC lease decision. They, then, experienced substantial upward adjustments upon the disclosure of the capitalized lease information. First, the possible reason for the larger adverse effect is that investors might have been concerned primarily with the impact of lease capitalization on the firms' capital structures (or on the balance-sheet-based financial ratios, such as debtequity ratio), rather than with the impact on the firms' operating results as reflected in the eaiTiings-per-share figures. Moreover, such an impact was anticipated by investors even prior to the release of the PV numbers which might have been used by investors as surrogates for the measures of capital structures. In this case, it is likely that the security prices of the firms with higher PV ratios could be more affected by the predisclosure events of the SEC decision than the security prices of the firms with lower PV ratios. As seen in table 1, the mean values of thePV ratios were higher for the lowrisk PV-/E firms (.264 for 1973 and .282 for 1974) than for the high-risk PV-IE firms (.203 for 1973 and .210 for 1974). Second, the reason for the upward revision of investor's expectations about the lowrisk PV-/E firms may be that, when thePV and IE numbers (especially the IE numbers) were released, investors might have revised their expectations about the low-risk firms. The reason is that they might have realized that the burden of lease commitments, measured in terms of the changes in earnings per share as a result of leeise capitalization, on the part of the low-risk firms turned out to be much less than they had previously assumed. Note that the mean/ ratio was only -.062 for the low-risk firms for 1973, while the same ratio was -.178 for the high-risk firms. (See table 1.) However, one difficulty with this alternative exploration is: why did the above two reasons not take place in the other three groups, PV-L, PV-H, and PVIE-H? It seems that a satisfactory answer to this question cannot be found simply by comparing the magnitudes of thePV and/ numbers between the low. and high-risk PV-/E firms.

336

BYUNG T. RO

by the investment community prior to the disclosure of the capitalized lease numbers through accounting sources. The results also show that the capitalized lease disclosure did, overall, have an adverse effect on the valuation of the firms, although a slight upward readjustment of the security prices upon the disclosure of the capitalized lease data was observed for the low-risk firms. This upward readjustment may indicate that the negative effects of the PV and IE numbers (especially the latter) on various financial ratios were not as bad as investors had originally anticipated. This evidence of adverse effects on the valuation of the firms is consistent with the result of a study by Nelson [1963], who found that lease capitalization adversely affected the financial ratios examined in his study. There is also strong evidence of risk-dependence of the lease disclosure effects. In general, the high-riskPV-/E firms were more adversely evaluated by investors, given the capitalized lease disclosure by the SEC, than were the low-risk PV-IE firms. The existence of such risk dependence is inconsistent with the situation found by Gonedes [1975], where no such dependence was shown to exist between the relative risk of firms and the effect of special items that he investigated. 5. Conclusions Given the empirical findings of this study, it seems reasonable to draw the following conclusions. (1) The capitalized lease disclosure along with income effect disclosure, required by the SEC, did significantly change the distribution of security returns. Hence, the SEC's extended lease disclosure decision of 1973 had an impact on the pricing of securities for the firms which were affected by the decision. (2) The observed price effect was less significant for the firms which made only PV numbers public, without disclosure of IE numbers as well. This seems to imply that the balance sheet effect itself of capitalized lease disclosure on the pricing of securities may not be as great as is generally believed. Alternatively, it appears that the balance sheet effect (if any) was already impounded in security prices prior to the SEC lease decision, possibly at or around the time when the contracts of the leases capitalized under ASR No. 147 were initially established. (3) The information effects of the various events of the SEC decision tended to be risk-dependent, in the sense that the extent of the market reaction to those events varied according to the firms' riskiness. In general, the security prices of the high-risk firms were more affected by the SEC decision than were the security prices of the low-risk firms. (4) The capitalized lease disclosure tended to have an adverse effect on the valuation of all firms, with the high-risk firms being more adversely evaluated by investors than the low-risk firms. This overall finding is consistent with Nelson's [1963] result, which showed that lease capitalization generally has an adverse effect onfirms*financialratios.

CAPITALIZED LEASE INFORMATION

337

The above conclusions must be qualified because of the small sample size, the lack of a test for the homogeneity of control group firms, and the sample firm selection criteria (NYSE firms which have the same fiscal year ending December 31). These potential sources of limitations open areas for future research on tbe subject. In addition, future research might consider grouping firms on the basis of the ranks of the PV ratios and/or the IE ratios. Then, some sort of statistical significance tests could be conducted. Also, the research design of the present study could be refined through a better matching of tbe treatment and control firms based on the standard errors of individual beta estimates and residual returns, in addition to beta estimates and the SIC code.

APPENDIX A Sample Firms Matched by Industries

SIC Code
1 2

Industry

No. of Pairs

Mining and construction 1 19 Manufacturing 27 Printing, publishing, and allied 1 industries 28 Chemicals and allied products 1 281 1 Industrial inorganic chemicals 29 1 Petroleum refining and related industries 324 1 Cement and hydraulic 33 1 Primary metal industries 331 Blast furnaces, steel works, and 1 rolling and finishing mills 343 1 Heating equipment 35 4 Machinery except electrical 366 1 Communication equipment 367 1 Electronic components and accessories 371 2 Motor vehicles and equipment 39 1 Miscellaneous manufacturing industries 394 Toys and amusement, sporting and 1 athletic goods 4 Transportation and public utilities 2 1 Railroads 48 Communication 1 5 Retail trade 2 6 Finance, insurance, and real estate 602 Commercial and stock savings banks 2 Others" 53 Total 99 " The consideration of the SIC code in matching firms was impossible for these firms. & 3

338

BYUNG T. RO

APPENDIX B Individual Beta Estimates Used in Matching Firms Firm No. Group 2 Group 1 Firm No. Group 2 Group 1
1

2
3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

27
28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

1.40 1.41 1.48 1.78 .3 8 .87 1.76 1.06 1.48 1.39 1.40 1.12 1.04 1.29 2.06 1.40 1.86 1.11 1.03 1.22 1.01 1.84 1.16 1.15 1.40 1.21 1.65 1.03 1.03 1.46 1.28 1.65 1.22 1.79 1.45 .3 9 1.37 1.33 1.03 1.30 1.10 1.56 1.47 1.41 1.03

1.40 1.36 1.46 1.65 .3 8 .87 1.62 1.07 1.47 1.37 1.41 1.08 1.04 1.30 1.92 1.34 1.74 1.10 1.03 1.23 1.00 1.71 1.15 1.13 1.36 1.20 1.58 1.02 1.04 1.43 1.25 1.48 1.20 1.68 1.42 .3 9 1.30 1.31 1.04 1.31 1.09 1.54 1.47 1.40 1.04

53 54 55 56

57
58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88

89
90 91 92 93 94 95 96 97

1.94 .94 1.28 1.28 1.78 1.66 2.11 1.12 1.16 1.42 1.76 1.39 1.14 1.26 1.21 1.66 1.37 .76 1.50 1.17 1.36 1.03 1.24 .95 .99 .87 1.71 1.92 1.26 2.25 1.76 1.64 1.94 1.53 1.13 1.30 1.24 1.06 1.65 1.42 .89 1.41 1.74 1.39 1.74

1.88 .4 9 1.27 1.25 1.65 1.58 1.98 1.11 1.13 1.42 1.64 1.33 1.13 1.24 1.20 1.51 1.32 .75 1.46 1.16 1.31 1.04 1.20 .96 1.00 .87 1.59 1.80 1.23 2.67 1.65 1.52 1.86 1.48 1.13 1.30 1.24 1.07 1.51 1.41 .89 1.38 1.64 1.37 1.62

CAPITALIZED LEASE INFORMATION 46 47 48 49 50 51 52 1.06 1,16 .91 1,80 1,62 .99 ^98 1,04 1.16 ,92 1,69 1,50 .99 ^8 98 99 Mean of ^ = Variance of ;8 = 1,74 1.75 1,366 ,105 1,50 1.66

339

1.328 .092

REFERENCES AxELSON, K. S. "Needed: A Generally Accepted Method for Measuring Lease Commitments." Financial Executive (July 1971): 40-52. Beaver, W. H. "The Information Content of Annual Earnings Announcements." Empirical Research in Accounting: Selected Studies, 1968. Supplement to Journal of Accounting Research 6: 67-92. , P. KETTLER, AND M. SCHOLES. "The Association between Market Determined and Accounting Determined Risk Measures." The Accounting Review (October 1970): 654-82. BoLCH, B. W., AND C. J. HUANG. Multivariate Statistical Methods for Business and Economics. Englewood Cliffs, N. J.: Prentice-Hall, 1974. BUFF, J. H. "Reporting of Leases in Financial Statements - The Investor's Viewpoint." Retail Control (June/July 1971): 19-24. COOK, D . C. "The Case against Capitalizing Leases.' Harvard Business Review (January/February 1963): 145-62. DEFLIESE, P . L. Should Accountants Capitalize Leases? The Economic Case against It at Present. New York: Coopers & Lybrand, 1973. DONALDSON, G. "New Framework for Corporate Debt Policy." Harvard Business Review (March/April 1962): 117-31. FAMA, E . F . , AND M . H . MILLER. The Theory of Finance. Hinsdale, 111.: Dryden Press, 1972. FERTUCK, L. "A Test of Industry Indices Based on SIC Codes.' Journal of Financial and Quantitative Analysis (December 1975): 837-48. GONEDES, N . J. "Risk, Information, and the Effects of Special Items on Capital Market Equilibrium.' Journal of Accounting Research (Autumn 1975): 220-56. , AND N. DOPUCH. "Capital Market Equilibrium, Information Production, and Selecting Accounting Techniques: Theoretical Framework and Review of Empirical Works." Studies on Financial Accounting Objectives. Supplement to Journal of Accounting Research 12 (1974): 48-129. , AND S. H. PENMAN. "Disclosure Rules, Information-Production, and Capital Market Equilibrium: The Case of Forecast Disclosure Rules.' Journal of Accounting Research (Spring 1976): 89-137. HAMADA, R. S. "The Effect of the Firm's Capital Structure on the Systematic Risk of Common Stock.' Journal of Finance (May 1972): 435-52. HARRIS, R. J. A Primer of Multivariate Statistics. New York: Academic Press, 1975. HARRISON, T. "Different Market Reactions to Discretionary and Nondiscretionary Accounting Changes." Journal of Accounting Research (Spring 1977): 84-107. HoTELLiNG, H. "The Generalization of Student's Ratio." Annals of Mathematical Statistics 2 (1931): 360-78. HuEFNER, R. J. "A Debt Approach to Lease Accounting." Financial Executive (March 1970): 30-36. KING, B. F . "Market and Industry Factors in Stock Price Behavior." Journa/ of Business (January 1966): 139-89. LEV, B . "On the Association between Operating Leverage and Risk.' Journal of Financial and Quantitative Analysis (September 1974): 627-41.

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MORRISON, D . F . Multivariate Statistical Methods. New York: McGraw-Hill, 1976. MYERS, J. H. Accounting Research Study No. 4: Reporting of Leases in Financial

Statements. New York: AICPA, 1962. A. T. "Capitalizing Leases-The Effect on Financial Ratios." Journal of Accountancy (July 1963): 49-58. NuRNBERG, H. "Leases, Purchase Commitments, and Pensions Revisited." CPA Journal (May 1973): 375-89. Ro, B. T. "The Disclosure of Capitalized Lease Information and Stock Prices." Ph.D dissertation, Michigan State University, 1976. SUNDER, S. "Relationship between Accounting Changes and Stock Prices: Problems of Measurement and Some Empirical Evidence." Empirical Research in Accounting: Selected Studies, 1973. Supplement to Journal of Accounting Research 11:1-45. VATTER, W. J . "Accounting for Leases." JournaZ of Accounting Research (Autumn 1966): 133-48. ZiSES, A. "Disclosure of Long-Term Leases.' Journal of Accountancy (February 1961): 37-47. . "The Pseudo-Leases-Trap and Time Bomh." Financial Executive (August 1973): 20-25.
NELSON,