If lenders fixate on total liabilities when making lending decisions, we also propose and test a potential solution. Recent research has shown that disaggregation can play an important role in how investors and creditors process information (Clor-Proell et al. 2010; Bloomfield et al. 2010), and we hypothesize that a similar type of disaggregation could reduce the extent to which lenders treat optional renewal periods the same as fixed lease obligations. For example, by disaggregating capitalized renewal options from capitalized fixed lease terms, lenders can more easily see the
impact that these ‘‘what-you-may-call-its’’ have on the financial position of the lessee firm and so adjust their calculations of leverage or other credit-related metrics as they see fit (Sprouse 1966). To test this prediction, we present a third group of participants with financial statements in which the capitalized lease obligations have been disaggregated into separate categories for non-cancelable lease periods and lease periods subject to renewal at the lessee’s discretion. Doing so allows us to test whether disaggregation can overcome much of the informational disadvantage of recognizing lease renewal options as if they were liabilities.