IFRS 16: A Necessity For Efficient Market Values? An Ex-Post Study On The Valuation Effects Of Recognized Operating Leases

Abstract: This study examines if the adoption of IFRS 16 has resulted in a lower disparity between market values and their intrinsic (true) values in an ex-post setting. With financial statements being an important source of information for the investment decisions of investors, we aim to understand whether the uniform treatment of previously off-balance sheet operating leases following IFRS 16 has facilitated share price information. As such, we investigate the difference in value relevance between recognized and disclosed operating leases. Two distinctive valuation models are used to estimate the firm intrinsic values of Nordic public firms, which is subsequently set in relation to the firm market value to establish an estimate of market misvaluation. In addition, we investigate whether the change in misvaluation is different for firms mainly owned by less sophisticated investors. Comparing the misvaluation pre- and post-IFRS 16 adoption, we find that the new standard has resulted in increased market misvaluation. Moreover, we observe that this increased misvaluation is more prominent for firms owned by less sophisticated investors. Our results also provide further nuance, by suggesting that the observed valuation effects of IFRS 16 is related to firm size and the level of analyst coverage. Value relevance of operating leases increases for relatively smaller firms with less analyst coverage. These findings indicate that, while there is a difference in value relevance between disclosed and recognized operating leases, regulators need to consider different investor-groups when assessing the ex-post effects of new accounting standards.