Hostname: page-component-586b7cd67f-gb8f7 Total loading time: 0 Render date: 2024-12-02T19:32:18.122Z Has data issue: false hasContentIssue false
  • English
  • Français

Leasing and Debt Financing: Substitutes or Complements?

Published online by Cambridge University Press:  06 April 2009

An Yan
An Yan
Affiliation:
[email protected], Ford ham University, School of Business, Department of Finance, 113 West 60th Street, New York, NY 10023.
Get access Rights & Permissions [Opens in a new window]

Abstract

Traditional finance theories typically treat leases and debt as substitutes. However, the empirical findings on the relation between leases and debt are mixed. This paper reinvestigates this relation. I present a model to incorporate different theories on the substitutability and complementarity between leases and debt, and I test the model implications empirically in a GMM framework that simultaneously controls for endogeneity problems and firms' fixed effects. The findings suggest that leases and debt are substitutes instead of complements. I also investigate the variation in the substitutability between leases and debt, and find that in those firms with more growth options or larger marginal tax rates, or in those firms paying no dividends, the substitutability is more pronounced, i.e., the cost of new debt increases to a larger degree with extra leases.

Type
2005 Sharpe Award Winner
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 3 , September 2006 , pp. 709 - 731
Copyright
Copyright © School of Business Administration, University of Washington 2006

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Adedeji, A., and Stapleton, R. C. “Leases, Debt, and Taxable Capacity.“ Applied Financial Economics, 6 (1996), 71–83.CrossRefGoogle Scholar
Ang, J., and Peterson, P. P. “The Leasing Puzzle.” Journal of Finance, 39 (1984), 1055–1065.CrossRefGoogle Scholar
Arellano, M. “An Alternative Transformation for Fixed Effects Models with Predetermined Variables.” Institute of Economics and Statistics, Oxford, Applied Economics Discussion Paper (1988).Google Scholar
Arellano, M., and Bond, S. R. “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations.” Review of Economic Studies, 58 (1991), 277–297.CrossRefGoogle Scholar
Arellano, M., and Bover., O. “Another Look at the Instrumental-Variable Estimation of Error-Components Models.” Journal of Econometrics, 68 (1995), 29–52.CrossRefGoogle Scholar
Barclay, M. J., and Smith., C.W. “The Priority Structure of Corporate Liabilities.” Journal of Finance, 50 (1995), 899–916.CrossRefGoogle Scholar
Bayless, M. E., and Diltz., D. J. “Debt Capacity, Capital Leasing, and Alternative Debt Instruments.” Akron Business and Economic Review, 19 (1988), 77–88.Google Scholar
Beattie, V.; Goodacre, A.; and Thomson., S. “Operating Leases and the Assessment of Lease-Debt Substitutability.” Journal of Banking and Finance, 24 (2000), 427–470.CrossRefGoogle Scholar
Blundell, R. W., and Bond., S. R. “Initial Conditions and Moment Restrictions in Dynamic Panel Data Models.” Journal of Econometrics, 87 (1998), 115–143.CrossRefGoogle Scholar
Graham, J. R.; Lemmon, M. L.; and Schallheim., J. S. “Debt, Leases, Taxes, and the Endogeneity of Corporate Tax Status.” Journal of Finance, 53 (1998), 131–162.CrossRefGoogle Scholar
Jensen, M. “Agency Cost of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
Krishnan, S. V., and Moyer., C. R. “Bankruptcy Costs and the Financial Leasing Decision.” Financial Management, 23 (1994), 31–42.CrossRefGoogle Scholar
Lewellen, W. G.; Long, M. S.; and McConnell., J. J. “Asset Leasing in Competitive Capital Markets.” Journal of Finance, 31 (1976), 737–798.CrossRefGoogle Scholar
Lewis, C. M., and Schallheim., J. “Are Debt and Leases Substitutes?” Journal of Financial and Quantitative Analysis, 27 (1992), 497–511.CrossRefGoogle Scholar
Lim, S. C.; Mann, S. C.; and Mihov., V. T. “Market Evaluation of Off-Balance Sheet Financing: You Can Run But You Can't Hide.” Working Paper, Texas Christian Univ. (2004).Google Scholar
Marston, F., and Harris., R. S. “Substitutability of Leases and Debt in Corporate Capital Structures.” Journal of Accounting, Auditing and Finance, 3 (1988), 147–170.CrossRefGoogle Scholar
McConnell, J., and Schallheim., J. S. “Valuation of Asset Leasing Contracts.” Journal of Financial Economics, 12 (1983), 237–261.CrossRefGoogle Scholar
Miller, M., and Upton., C. “Leasing, Buying, and the Cost of Capital Services.” Journal of Finance, 31 (1976), 761–786.CrossRefGoogle Scholar
Myers, S. C. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147–175.CrossRefGoogle Scholar
Myers, S. C., and Majluf., N. “Corporate Financing and Investment Decisions When Firms Have Information that Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 187–224.CrossRefGoogle Scholar
Sharpe, S. A., and Nguyen., H. H. “Capital Market Imperfection and the Inventive to Lease.” Journal of Financial Economics, 39 (1995), 271–294.CrossRefGoogle Scholar
Smith, C. W., and Wakeman., L. M. “Determinants of Corporate Leasing Policy.” Journal of Finance, 40 (1985), 895–908.CrossRefGoogle Scholar