Do Leases Expand Debt Capacity?

40 Pages Posted: 2 Apr 2008 Last revised: 1 Feb 2016

See all articles by Jim Schallheim

Jim Schallheim

University of Utah - Department of Finance

Kyle S. Wells

Dixie State College of Utah

Ryan J. Whitby

Utah State University - Huntsman School of Business

Date Written: April 2013

Abstract

Theoretically and empirically, debt and leases have been shown to be both substitutes and complements. To explore the relation, we divide our sample into two subsets: those that exhibit a complementary relation (43% increase debt after increasing leases), and those that exhibit a substitutionary relation (57% decrease debt after increasing leases). For complement firms, we find a significant negative relation between leasing and the firm’s size, marginal tax rate, and z-score, consistent with “complementary” theories. For substitute firms, we find a positive and significant relation between leasing, the marginal tax rate and changes in cash. We also find a significant positive stock market reaction to the announcement of the SLB, which is stronger for the complement subset of firms.

Keywords: Leasing, Capital Structure

JEL Classification: G31, G32

Suggested Citation

Schallheim, James S. and Wells, Kyle S. and Whitby, Ryan J., Do Leases Expand Debt Capacity? (April 2013). Journal of Corporate Finance, Vol. 23, 2013. Available at SSRN: https://ssrn.com/abstract=1114882 or http://dx.doi.org/10.2139/ssrn.1114882

James S. Schallheim

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-581-4434 (Phone)
801-581-7214 (Fax)

Kyle S. Wells (Contact Author)

Dixie State College of Utah ( email )

225 S. 700 East
St. George, UT 84770
United States

Ryan J. Whitby

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
435.797.9495 (Phone)

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