Do Low Profit Companies Prefer Lease Over Loan Because of Taxes?

8 Pages Posted: 21 Sep 2013

See all articles by Shujaat Mubarik

Shujaat Mubarik

University of Malaya (UM), Faculty of Economics & Administration (FEA); IoBM, Karachi; Mohammad Ali Jinnah University

Date Written: January 1, 2012

Abstract

Businesses have a large number of options available with regards to the investment and financing of fixed assets. These assets could be purchased outright, hired, rented or leased. Because the accounting treatment differs substantially, so some time business prefers one financing option over others. As leases come in many sizes, shapes, and forms, but four types of leasing transactions are made i.e. service lease, financial lease, sale and lease back, and averaged lease. The focus of this study is to find out the factors due to which low profit companies prefer lease financing over loan. The major dimensions are tax benefit, rental payments, no requirement of collateral and simple documentation. One important point is that leasing is done at some fixed rate of interest. It allows a business to better predict its future cash flows. But in case of bank financing (credit) a floating rate is kept, which makes business volatile to market rate variations. We have taken the cross sectional data of 30 companies and have analyzed it through multiple linear regression.

Keywords: Lease, Floating interest rate, Financial lease, Sale and lease back, Averaged lease

JEL Classification: D23, D24, D46

Suggested Citation

Mubarik, Muhammad Shujaat and Mubarik, Muhammad Shujaat, Do Low Profit Companies Prefer Lease Over Loan Because of Taxes? (January 1, 2012). Available at SSRN: https://ssrn.com/abstract=2328639 or http://dx.doi.org/10.2139/ssrn.2328639

Muhammad Shujaat Mubarik (Contact Author)

University of Malaya (UM), Faculty of Economics & Administration (FEA) ( email )

University of Malaya
Kuala Lumpur, Wilayah Persekutuan 50603
Malaysia

IoBM, Karachi ( email )

Korangi Creek,
Karachi, Sindh 75190
Pakistan

Mohammad Ali Jinnah University ( email )

22E
Block 6 PECHS
Karachi, SC Sindh 75400
Pakistan

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