Changes on leverage and enterprise value of IFRS 16: Evidence from listed European companies

The present study examines the impact of IFRS 16 adoption on companies listed on the main European stock indexes. The standard has led to changes across multiple key financial metrics, especially in leverage, leading to question how it impacts a firm’s perception and value. With simultaneous focus on financial leverage and company value, the debt-to-equity ratio (D/E) and enterprise value (EV) are calculated using the originally reported and the restated financial values of 2018, the year prior to IFRS 16 implementation, revealing an increase in both financial metrics. Impacts are analysed on a sectoral perspective, with lease-intensive sectors such as transportation, retail and accommodation persistently among the most impacted by the capitalization and on balance sheet recognition of operating leases. Alternatively, sectors with lower lease reliance, such as real estate, utilities and financial services exhibit minimal changes. The rise in these metrics is mostly driven by the additional recognition of debt related to lease liabilities, reflecting an increase in value from an accounting recognition perspective and not an economic reality perspective. An econometric analysis is conducted using a random effects model on panel data, revealing no statistically significant effect of IFRS 16 adoption on companies’ market capitalization values, suggesting that markets already incorporated operating lease information in their valuations and have not revalued companies beyond their economic fundamentals following the standard introduction. The findings are in line with market efficiency and imply that valuations are overall based on economic substance and not revalued towards different accounting treatments. Overall, this dissertation contributes to literature by providing further empirical evidence on IFRS 16 impacts on both leverage and valuation and understanding real-world impacts of accounting standard updates, filling gaps in literature by focusing on a broader market perspective and covering a pan-European, major stock index-based sample.