Efficiency gains from accounting regulatory compliance

Using the recent lease accounting standard change (ASC-842), I examine whether the process of complying with new accounting standards has positive spillover effects on operating efficiency through managerial learning. To separate managerial learning from the potential benefits of enhanced disclosures, I exploit the relatively long transition period (2017-2018), wherein managers had access to new information related to operating leases that was not disclosed to the market. I find that firms with a high proportion of operating leases experience an increase in profitability and a reduction in operating leases during the transition-period relative to other firms. I document that the results are not driven by substitution to capital leases or the purchase of PPE. Additional analyses reveal that the results are concentrated in firms with poor internal information environments and high business complexity. My results support the claim that the information generated through the compliance process can lead to efficiency gains.