Do Leases Expand Debt Capacity?
40 Pages Posted: 2 Apr 2008 Last revised: 1 Feb 2016
Date Written: April 2013
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: Suggested Citation