ABSTRACT
This study examines how Japanese banks evaluate off-balance sheet operating leases in their credit assessments. Using a sample of 6,985 firm-year observations in Japan over the period 2001 to 2017, we find that banks in Japan evaluate off-balance sheet operating leases in certain circumstances. First, we find that banks evaluate such leases when firms have a strong relationship with a main bank. Second, banks assess firms' credit risk by evaluating operating leases if there is a strong main bank relationship especially when estimation reliability is low. We uncover robust results by controlling for the systematic characteristics of a strong main bank relationship. Our study thus suggests that the main bank relationship plays the important role of conveying the off-balance sheet operating leases in loan contracts in Japan.