A longstanding conjecture is that accounting is meant to facilitate corporate finance by reducing contracting costs between firms and capital providers. This study conducts one of the first systematic analyses of the purpose, benefits, and costs of using accounting in contracts for lease financing, which rivals lending as a source of corporate financing. Using a novel dataset of U.S. commercial real estate lease contracts, I find that these contracts often specify lease payments in which tenants pay a percentage of their monthly revenues in rent, rather than a fixed amount. The adoption of this type of lease is significantly linked to landlord-tenant risk-sharing motives and lower default rates. Overall, these findings make explicit how accounting's contracting role differs for lease and debt financing, and inform accounting standard setters such as the FASB, which is continuously engaged in modifying standards that can affect the revenue metrics used in these contracts.
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