Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-15T07:03:18.618Z Has data issue: false hasContentIssue false
  • English
  • Français

Are Debt and Leases Substitutes?

Published online by Cambridge University Press:  06 April 2009

Craig M. Lewis  and
James S. Schallheim
Get access Rights & Permissions [Opens in a new window]

Abstract

Lease valuation models often begin with the assumption that leases and debt are substitutes. This paper demonstrates that, because leasing is a mechanism for selling excess tax deductions, it can motivate the lessee firm to increase the proportion of debt in its capital structure relative to an otherwise identical firm that does not use leasing. Thus, debt and leases can be complements. We also show that a competitive lessor will use diversification to reduce risk and increase the probability that tax deductions are fully utilized so that it can lower lease payments.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 4 , December 1992 , pp. 497 - 511
Copyright
Copyright © School of Business Administration, University of Washington 1992

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ang, J., and Peterson, P.. “The Leasing Puzzle.” Journal of Finance, 39 (09 1984), 1055–1065.CrossRefGoogle Scholar
Bowman, R. “The Debt Equivalence of Leases: An Empirical Investigation.” Accounting Review, 55 (04 1980), 237–253.Google Scholar
Dammon, R., and Senbet, L.. “The Effect of Taxes and Depreciation on Corporate Investment and Financial Policy.” Journal of Finance, 43 (06 1988), 357–374.CrossRefGoogle Scholar
DeAngelo, H., and Masulis, R.. “Optimal Capital Structure Under Corporate and Personal Taxation.” Journal of Financial Economics, 8 (03 1980), 3–30.CrossRefGoogle Scholar
Mackie-Mason, J. “Do Taxes Affect Corporate Financing Decisions?” Journal of Finance, 45 (12 1990), 1471–1493.CrossRefGoogle Scholar
McGugan, V., and Caves, R.. “Integration and Competition in the Equipment Leasing Industry.” Journal of Business, 47 (07 1974), 382–396.CrossRefGoogle Scholar
Myers, S.; Dill, D.; and Bautista, A.. “Valuation of Financial Lease Contracts.” Journal of Finance, 31 (06 1976), 799–819.CrossRefGoogle Scholar
Ross, S.; Westerfield, R.; and Jaffe, J.. Corporate Finance, Second Ed. Boston, MA: Irwin (1990).Google Scholar
Schallheim, J.; Johnson, R.; Lease, R.; and McConnell, J.. “The Determinants of Yields on Asset Leasing Contracts.” Journal of Financial Economics, 19 (09 1987), 45–67.CrossRefGoogle Scholar
Stickney, C.; Weil, R.; and Wolfson, M.. “Income Taxes and Tax-Transfer Leases.” Accounting Review, 58 (04 1983), 439–459.Google Scholar