Leasing versus purchasing: Direct evidence on a corporation’s motivations for leasing and consequences of leasing

Ezzell, John R.; Vora, Premal P.

doi:10.1016/s1062-9769(00)00060-0

Cited by 38 publications

(26 citation statements)

References 18 publications

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“…Sharpe and Nguyen (1995) examine the role of financial contracting costs on the propensity to lease and find that leasing reduces costs of external financing due to asymmetric information. Ezzell and Vora (2001) also find that leasing reduces external financing costs. Fazzari, Hubbard and Petersen (1988) and Hubbard (1998) investigate the role of capital market imperfections on investment expenditures by firms and find that investments are significantly and positively related to internal cash flow 1 .…”

mentioning

confidence: 84%

“…Hence the leasing versus buying of property, plant and equipment will not be irrelevant if the lessor has market power or if taxes, contracting costs, and production/investment incentives are affected by the choice between buying and leasing. As noted by Sharpe and Nguyen (1995), Ezzell and Vora (2001) the lease financing can increase firm value if it lowers taxes, reduces contracting costs, or improves investment policy. Stulz and Johnson (1985) further argue that the non-cancellable long-term leases should also help mitigate the underinvestment problem due to debt overhang identified by Myers (1977).…”

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confidence: 98%

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Capital Market Frictions, Leasing and Investment

Chigurupati

Hegde

2009

SSRN Journal

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This paper examines the effect of leasing of property, plant and equipment on investment expenditure by non-financial Standard & Poor's (S&P) 100, S&P 400 and S&P 600 lessee firms over the period of [1995][1996][1997][1998][1999][2000][2001][2002][2003][2004][2005][2006]. I find that leasing mitigates underinvestment problem by positively enabling capital expenditures and reducing the sensitivity of investment expenditures to availability of internal funds in sample firms. The results are robust to several alternative measurements of the key variables and different regression specifications and estimation techniques. Consistent with theory, lessee firms with higher information asymmetry rely on more lease financing. However, the evidence on agency costs is mixed. Consistent with past studies, leasing by lessee corporations is significantly positively correlated with firm size, tax loss carry forwards and significantly negatively correlated to profitability margin and average tax rate. Capital market frictions, Leasing and Investment Introduction:The Equipment Leasing and Finance Association (ELFA) estimates, in its 2008 industry future council report, that the market size for equipment/asset acquisition is $1.3 trillion with $600 billion leased or financed. Leasing offers flexible terms and customized options that take into account the needs of cash flow, budget, seasonal fluctuations and transaction structure. Further, the top reason for leasing of property, plant and equipment is the consistent expenses in capital budget planning. Also, for some firms such as small and young firms, firms with no credit rating, financially constrained/distressed firms leasing may be the only option. So, does leasing positively affect the capital expenditure of lessee firms? Does leasing reduce the investment-cash flow sensitivity for the lessee firms? These are the two central questions examined in this study. The analysis in this study focuses on lessees. I intend to contribute to the finance literature by integrating the existing literature on leasing as well as financial constraints. In this paper, for the first time to the best of my knowledge, I examine the role of leasing on increasing investment expenditure and decreasing the investment-cash flow sensitivity of lessee corporations. Further, using market based measures for agency and information asymmetry, I offer empirical evidence on the role of information and agency frictions on lease financing by lessee firms.The corporate financing decision of lease versus buy/borrow, is usually analyzed in the Modigliani and Miller (1958) framework of perfect capital markets. In the classical Modigliani and Miller (1958) world of perfect capital markets, a firm's mix of equity, debt and lease capital i.e. capital structure is irrelevant in determining firm value. Smith and Wakeman (1985) argue that, as a special case of Modigliani and Miller irrelevance proposition, in case of competitive markets with no taxes and no contracting costs the net cash flow from the use of an asset is in...

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confidence: 84%

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confidence: 98%

Capital Market Frictions, Leasing and Investment

Chigurupati

Hegde

2009

SSRN Journal

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“…These events fall in a time frame that is almost completely distinct from prior studies. Ezzell and Vora's (2001) sample has the most recent observations and covers the period 1984-1991; only two events in our sample occur prior to 1994. Summary statistics are reported in Table 2.…”

Section: Methodsmentioning

confidence: 99%

“…They predict that tax changes in the Tax Reform Act of 1986 had a negative impact on the tax benefits of sale and leasebacks, and their event study found supporting evidence. Most recently, Ezzell and Vora (2001) provide evidence that lessee firms' tax rates are negatively related to average cumulative abnormal returns for lessee firms announcing sale and leasebacks between 1984 and 1991. The study did not separate the sample or otherwise examine how changes in tax rules affected the observed wealth gains, however.…”

Section: Related Literaturementioning

confidence: 99%

“…As a final test, we are able to identify a proxy for the lessee firm's tax rate using information from COMPUSTAT. Following Ezzell and Vora (2001), we create a proxy for the tax rate by dividing operating income before depreciation by the taxes paid for the year prior to the sale and leaseback announcement. We expect that lessee firms with lower tax rates may be less able to utilize the deprecation tax benefits of real estate ownership.…”

Section: T-statmentioning

confidence: 99%

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The Wealth Effects of Sale and Leasebacks: New Evidence

Fisher¹

2004

Real Estate Economics

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This paper investigates the phenomenon of sale and leasebacks as one way in which firms may use financial contracts to rearrange their organizational architecture. A theoretic model links the length of initial leaseback period to incentives to make noncontractible future investments in the lease relationship and predicts that firms choose shorter leases when landlords make relatively important investments. Using a sample of 71 sale and leaseback events from the 1990s, we document a significant mean abnormal return of 1.3% for shareholders of seller/lessee firms announcing relatively short leasebacks. The evidence suggests that firms may use sale and leasebacks to optimize their claims to real estate. Copyright 2004 by the American Real Estate and Urban Economics Association

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