Leases and Over-investment

72 Pages Posted: 17 Jun 2019

See all articles by Timothy Eaton

Timothy Eaton

Miami University of Ohio - Department of Accountancy

Craig Nichols

Syracuse University

James Michael Wahlen

Indiana University - Kelley School of Business - Department of Accounting

Matthew M. Wieland

Miami University of Ohio - Department of Accountancy

Date Written: June 6, 2019

Abstract

What factors enhance investment efficiency in leased assets, and what incentives give rise to over-investments? If firms over-invest in leases, what economic consequences arise? We develop a model of expected investment in leased assets, and use the residuals from the model as proxies for inefficient investments. We find that, in contrast to investments in capital expenditures, leasing appears to be a mechanism for over-investment even among firms with high reporting quality and negative free cash flows. Examining economic consequences, we predict and find that over-investments in leased assets trigger increasing future sales growth but declining future earnings growth for as long as three years ahead. We also find a negative relation with contemporaneous stock returns, suggesting investors view over-investments in leases as value destructive. Finally, despite negative earnings and returns consequences, we find that over-investments in leases are associated with higher CEO compensation driven primarily by future sales growth. Our results should inform investors, board members, and researchers interested in investment efficiency, corporate governance, and leases.

Keywords: Leases, Over-investment, Corporate Governance, Compensation, Sales and Earnings Growth, Stock Returns

Suggested Citation

Eaton, Timothy and Nichols, Craig and Wahlen, James Michael and Wieland, Matthew M., Leases and Over-investment (June 6, 2019). Kelley School of Business Research Paper No. 19-27. Available at SSRN: https://ssrn.com/abstract=3400090 or http://dx.doi.org/10.2139/ssrn.3400090

Timothy Eaton

Miami University of Ohio - Department of Accountancy ( email )

310 Laws Hall
Oxford, OH 45056-1675
United States

Craig Nichols

Syracuse University ( email )

900 S. Crouse Avenue
Syracuse, NY 13244-2130
United States

James Michael Wahlen (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2658 (Phone)
812-855-8679 (Fax)

Matthew M. Wieland

Miami University of Ohio - Department of Accountancy ( email )

310 Laws Hall
Oxford, OH 45056-1675
United States

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