Managing the Balance Sheet with Leases

43 Pages Posted: 21 Jul 2012 Last revised: 7 Jun 2018

See all articles by Kimberly Rodgers Cornaggia

Kimberly Rodgers Cornaggia

Pennsylvania State University - Department of Finance

Laurel Franzen

Loyola Marymount University

Timothy T. Simin

Pennsylvania State University

Date Written: October 25, 2015

Abstract

We document significantly increased reliance on off-balance-sheet (OBS) lease financing that is inconsistent with economic theory. Specifically, the increase is greatest among non-distressed firms characterized by growth options and high R&D but without obvious tax incentives. We explore alternative incentives and find that (1) OBS leasing enables firms to manage debt covenants limiting debt or capital expenditures, (2) excess OBS leasing is diminished by scrutiny of institutional investors, and (3) firms investigated by the SEC or DOJ for financial misrepresentation exhibit high levels of excess OBS leasing. Overall, we conclude that firms use OBS leases to expand their debt capacity while preserving conservative balance sheets.

Keywords: Financial risk, Manipulation, Lease financing, Off-Balance-Sheet

JEL Classification: G32, M41, M48

Suggested Citation

Cornaggia, Kimberly Rodgers and Franzen, Laurel and Simin, Timothy T., Managing the Balance Sheet with Leases (October 25, 2015). Available at SSRN: https://ssrn.com/abstract=2114454 or http://dx.doi.org/10.2139/ssrn.2114454

Kimberly Rodgers Cornaggia (Contact Author)

Pennsylvania State University - Department of Finance ( email )

306 Business Bldg
University Park, PA 16802
United States
814-865-2243 (Phone)
814-865-3362 (Fax)

HOME PAGE: http://directory.smeal.psu.edu/kjr15

Laurel Franzen

Loyola Marymount University ( email )

7900 Loyola Boulevard
Los Angeles, CA 90045
United States

Timothy T. Simin

Pennsylvania State University ( email )

University Park, PA 16802
United States
814-865-3457 (Phone)

HOME PAGE: http://timsimin.net

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