Incentives for Leasing: Evidence from the Largest U.S. Lessees and Lessors

36 Pages Posted: 2 Mar 2002

See all articles by Kenneth M. Eades

Kenneth M. Eades

University of Virginia - Darden School of Business

Felicia C. Marston

University of Virginia - McIntire School of Commerce

Date Written: October 11, 2002

Abstract

We investigate the incentives for leasing by constructing samples of the 100 largest lessees and 100 largest lessors in the U.S. Our lessee sample accounts for more than 60 percent of the leasing dollars of Compustat firms, and our lessor sample captures approximately 80 percent of the equipment leasing market. Thus, our unique sample design gives us access to most of the aggregate supply and demand for leasing in the U.S. economy. Contrary to previous empirical research that focuses on the marginal influences of tax status and access to capital markets within large cross-sectional samples, our work reveals little evidence that either taxes or financial contracting motives control the leasing decisions of the largest lessors and lessees. In addition, by examining the footnotes to the financial statements, we find support for Smith and Wakeman's (1985) assertion that non-firm specific assets are a better source of leasing synergies than are firm-specific assets. We also find evidence that real options as modeled by Grenadier (1995) are likely to be a primary incentive for leasing. On balance, our results suggest that the efficiency of the leasing contract is more likely derived from the flexibility afforded the contracting parties and other asset-specific attributes rather than from tax arbitrage or reduced cost of capital.

Keywords: Leasing, real options, contracting cost, financial structure

JEL Classification: G32

Suggested Citation

Eades, Kenneth M. and Marston, Felicia C., Incentives for Leasing: Evidence from the Largest U.S. Lessees and Lessors (October 11, 2002). Available at SSRN: https://ssrn.com/abstract=301552 or http://dx.doi.org/10.2139/ssrn.301552

Kenneth M. Eades

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4825 (Phone)
434-924-0714 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/eades.htm

Felicia C. Marston (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
804-924-1417 (Phone)

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