Hidden Leverage in Nonfinancial Corporations

Cody Kallen
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Cody Kallen: https://www.federalreserve.gov/econres/cody-f-kallen.htm

No 1441, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: A substantial portion of corporate debt remains hidden from balance sheets. I document two forms of off-balance-sheet leverage in nonfinancial corporations: operating leases (pre-2019) and intraperiod borrowing—short-term debt issued and repaid within reporting periods, which I am the first to study in nonfinancial firms. Approximately 29 percent of publicly traded firms used substantial operating leases and 12 percent show evidence of substantial intra-period borrowing, with a disproportionate subset using both types of hidden debt. Firms using substantial hidden leverage are generally smaller, more reliant on short-term funding, are less monitored by sophisticated market participants, and report lower leverage, suggesting they use off-balance-sheet debt to project false leverage profiles. When accounting changes in 2019 revealed substantial operating leases, affected firms subsequently cut capital expenditures by 25 percent and R&D by 14 percent, faced heightened risks of executive turnover and stakeholder scrutiny, and experienced more frequent accounting problems. Critically, revelation of substantial operating leases caused these exposed firms to curtail their intra-period borrowing and to raise their reported non-lease leverage.

Keywords: off-balance-sheet; lease financing; capital structure; disclosure of off-balance-sheet financing (search for similar items in EconPapers)
JEL-codes: G14 G32 M48 (search for similar items in EconPapers)
Pages: 48 p.
Date: 2026-07-16
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:103561

DOI: 10.17016/IFDP.2026.1441

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