In the context of leasing, we belie

In the context of leasing, we believe placement, labeling, and aggregation are particularly relevant. In particular, when standards require preparers to capitalize optional renewal periods, we expect that the bundling of a renewal period together with the fixed portion of a lease obligation will cause users to treat firms with options as if the options have already been exercised. The literature on presentation effects suggests that users will not demarcate the renewal periods from the original lease term. Even though capitalization recognizes a symmetric increase in both the assets and liabilities recognized on the balance sheet, equity stays constant, such that this grossing up of the balance sheet will generally make a firm look more highly leveraged. Therefore, we expect participants to be less willing to lend to firms with optional renewal periods when these renewal periods are capitalized as part of the firm’s total lease liabilities than when these optional renewal periods are merely disclosed. This leads to our first prediction: