A Test of the Substitution between Debt and Leases Using Sale-and-Leaseback Transactions

Schallheim, Jim; Wells, Kyle; Whitby, Ryan J.

doi:10.2139/ssrn.1114882

Cited by 5 publications

(1 citation statement)

References 13 publications

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“…Their theories, based on tax arbitrage (see previous tax section) and bankruptcy costs, predict that debt and leases can indeed be complements. Therefore, for many researchers the true nature of the relationship between debt and leases remains an empirical issue (Schallheim et al, 2007), and calls for further investigation. Eisfeldt and Rampini (2009) suggest a model in which leasing increases debt capacity.…”

Section: Leverage and Cash Flowsmentioning

confidence: 99%

Determinants of leasing propensity in Canadian listed companies

Callimaci

Fortin²,

Landry³

2011

International Journal of Managerial Finance

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Purpose -The purpose of this paper is to examine the relationship between a firm's propensity to lease and several firm characteristics: tax position, financial constraint, ownership structure, growth, and size. Design/methodology/approach -Controlling for industry, total lease share, operating and capital lease share ratios, obtained using an income statement approach, are regressed on a trichotomous tax variable, a dichotomous cash flow coverage ratio variable, debt over fixed assets, ownership concentration, market to book value of shares and the natural log of sales. Findings -Total lease share increases with leverage, tax position and growth; it decreases with cash flow coverage, ownership concentration and firm size. Results for operating lease share are similar to those for total lease share. In contrast, capital lease share decreases with tax position and increases with ownership concentration and size.Research limitations/implications -The results suggest that leasing offers added debt capacity and increases in financially constrained firms. Firms that pay high taxes seem to place more value on the constant stream of tax deductions from the rental payments than on deductions from decreasing interest costs and amortization. Finally, highly concentrated Canadian firms may use less leasing because they are more family-controlled. Originality/value -The literature offers mixed reasons for firms' decisions to lease or purchase assets. This study provides further evidence in a rich setting. In 2001, the Canadian tax authorities changed the tax treatment of leases, thus providing an opportunity to validate prior results on the impact of taxes on leasing. By including two different measures of financial constraint, this study disentangles the substitution and the added debt capacity hypotheses.

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Section: Leverage and Cash Flowsmentioning

confidence: 99%