Are Debt and Leases Substitutes?

Lewis, Catherine; Schallheim, James S.

doi:10.2307/2331137

Cited by 109 publications

(61 citation statements)

References 8 publications

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“…In contrast to this accepted wisdom, Lewis and Schallheim (1992) demonstrate analytically that debt and leasing can be complements. They argue that leasing is a mechanism for selling excess tax deductions that can motivate lessee firms to increase the proportion of debt in their capital structure.…”

Section: Theoriesmentioning

confidence: 69%

“…They referred to this result as the 'leasing puzzle'. Although subsequent analytical work by Lewis and Schallheim (1992) demonstrated the theoretical possibility of complementarity, more recent empirical papers have supported substitutability (Marston andHarris,1988 andAdedeji andStapleton, 1996) although the evidence in Mehran et al, (1997) is mixed.…”

Section: Introductionmentioning

confidence: 99%

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Operating leases and the assessment of lease–debt substitutability

Beattie

Goodacre

Thomson

2000

Journal of Banking & Finance

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Operating leases are estimated in the current paper to be approximately thirteen times larger than finance leases, on average. In recognition of this, the paper investigates the degree of substitutability between leasing and non-lease debt using a comprehensive measure of leasing, improving on the partial measures used in prior research. Operating lease liabilities are estimated using the 'constructive capitalisation' approach suggested by Imhoff et al. (1991), modified to incorporate company-specific and UK-relevant assumptions. The results imply that leasing and debt are partial substitutes, with £1 of leasing displacing approximately £0.23 of non-lease debt, on average, consistent with the argument that lessors bear some risks which are not inherent in debt contracts. These findings suggest that substitution effects are not uniform across lease types. JEL classification: G32

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Section: Theoriesmentioning

confidence: 69%

Section: Introductionmentioning

confidence: 99%

Operating leases and the assessment of lease–debt substitutability

Beattie

Goodacre

Thomson

2000

Journal of Banking & Finance

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“…Graham, Lemmon, and Schallheim (1998) present the "first unambiguous evidence supporting the hypothesis that low tax rate firms lease more, and have lower debt levels, than high tax rate firms" by calculating a before-interest marginal tax rate so as to circumvent the endogenous relation between tax rates and debt through interest payments. Other papers that weigh in on the "substitutes or complements" debate include Lewis and Schallheim (1992) and Yan (2006). 4 Pension obligations might be expected to have a larger effect on regressions at the industry and product market levels, such as those we present in Table 10.…”

Section: B Discounting and Valuing Operating Leasesmentioning

confidence: 99%

Explaining Corporate Capital Structure: Product Markets, Leases, and Asset Similarity*

2011

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Better measurement of the output produced and capital employed by firms substantially improves the ability to explain capital structure variation in the cross-section. For every firm, we construct the set of other firms producing the same output using the set of product market competitors listed in the firm's public SEC filings. In addition, we improve measurement of capital structure by explicitly accounting for leased capital. These two steps increase the explanatory power of the average capital structure of other firms producing similar output on a firm's capital structure by 50 to 75%, compared to the use of the average unadjusted debt ratio of other firms in the same 3-digit SIC code. We provide evidence that the large explanatory power of the capital structure of other firms producing similar output is related to the assets used in the production process. Our findings suggest that what a firm produces and the assets used in production are the most important determinants of capital structure in the cross-section.

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“…Deloof et al (2007) point out that leases and debt are fixed, contractual obligations that reduce the firm's debt capacity. The literature shows that leases and corporate debt are substitutes in case of both large organisations and SMEs (e.g., Huang and Yildirim, 2006;Deloof et al, 2007;Yan, 2006;Beattie et al, 2000;Lasfer and Lewis, 1998;Adedeji and Stapleton, 1996;Nguyen and Sharpe, 1995;Krishnan and Moyer, 1994;Lewis and Schallheim, 1992). While Huang and Yildirim (2006) observe that the substitution ratio increases as debt maturity increases, Lasfer and Lewis (1998) find that the substitutability of debt and lease contracts for large companies was largely driven by taxes.…”

Section: Literature Reviewmentioning

confidence: 99%