Determinants of leasing propensity in Canadian listed companies

Abstract

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.

Operating lease decision among east Asian firms; critical factors for sustainable development

“…This article follows the model proposed by Callimaci et al (2011), which estimated Canadian companies' propensity to lease or to buy. This article selects nine explanatory variables: return on assets (ROA), fixed asset expenses (FAE), interest cost (IC), profit, ratio of long‐term debt to total assets (LTDEBT), leverage, tax, growth, and size.…”

“…In the last five years, researchers have revealed the core determinants of operating leases. For instance, Callimaci et al (Callimaci et al, 2011) indicated a close relationship between a firm's tendency to lease and tax, financial limitations, ownership structure, size and growth. The findings are based on Canadian Government data of 1,016 Canadian companies.…”

“…Bathala and Mukherjee's (1995) focused on small companies because these firms more often lease when there is no opportunity to purchase assets without external financing. Callimaci et al (Callimaci et al, 2011) highlighted the major determinants and intentions to lease among the Canadian companies. Using panel data over a two‐year period they examined the total lease share which included capital lease share and operating lease shares.…”

“…Therefore the investigation of the most significant factors affecting the leasing propensity among Malaysian firms is an important issue which has yet to be explored. From the above literature review, some factors have already been investigated such as size, industry, nature of assets, financial constraints, taxes, management compensation, ownership structure and growth (Callimaci et al, 2011; Slotty, 2009). However, in this article, profit, the ratio of long‐term debt to total asset, leverage, tax, growth, and size are included and examined against leverage.…”

“…Morais (2013) in his study of major factors determining leasing versus buying found that ownership structure and lease tendency have a negative relationship with leasing. In addition, a survey of Callimaci, Fortin and Landy (Callimaci, Fortin, & Landry, 2011) using a Canadian data set identified that the leasing propensity increases with more leverage, with firms with constrained finance, firms with high‐tax, and firm's growth, while decreasing as firm size increases. Further they found that ownership structure is negatively related to the lease propensity, which suggests that highly concentrated Canadian firms use less leasing.…”