The Determinants of the Leasing Decision of Small and Large Companies

Abstract

We analyse the leasing decision of more than 3000 UK quoted and unquoted companies over the sample period 1982-1996. We show that, for the sample as a whole, companies that use leasing are more likely to have tax losses, high fixed capital investment, high debt-to-equity ratio and to be larger than companies that do not use leasing. We show, however, that the determinants of leasing are not homogeneous across firms of different size. For large companies, leasing, profitability, leverage and taxation are positively correlated. In contrast, for small companies, the leasing decision is not driven by taxation or by profitability, but by growth opportunities. We show that small firms with high Tobin's q and those that are less profitable are more likely to use leasing.

Leasing by small enterprises

“…(3) Agency costs: The use of leasing may reduce agency costs of the separation between ownership and control in larger companies, because leasing is not an investment decision and lessors have first claim over the asset (Lasfer and Levis, 1998). However, the separation between ownership and control of the leased asset involves agency costs even in smaller, owner-controlled firms (Eisfeldt and Rampini, 2009).…”

“…Eisfeldt and Rampini, 2009;Haunschild, 2004;Deloof and Verschueren, 1999;Adams and Hardwick, 1998;Lasfer and Levis, 1998;Sharpe and Nguyen, 1995). Most studies focus on medium-sized or larger firms, neglecting smaller ones.…”

International lease-accounting reform and economic consequences: The views of U.K. users and preparers

“…Large companies were more acutely aware than those in small companies of the need to renegotiate bond covenants (mean = 4.13 (large); 3.79 (small); panel A, row 6), perhaps because large companies are likely to have greater exposure to securitized long-term debt (Lasfer and Levis, 1998;Bevan and Danbolt, 2002). On the other hand, small companies showed greater concern over the expected increase in administrative burdens (mean = 3.83 (small);…”

“…Preparer responses might also be associated with company size, since large and small companies typically have different financing mixes (Lasfer and Levis, 1998;Bevan and Danbolt, 2002), different negotiating power and different administrative capabilities.…”

Emerging market financial services development: the case of leasing in Poland and China

“…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.…”