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Leasing and Debt Financing: Substitutes or Complements?

Published online by Cambridge University Press:  06 April 2009

An Yan
An Yan
Affiliation:
[email protected], Ford ham University, School of Business, Department of Finance, 113 West 60th Street, New York, NY 10023.
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Abstract

Traditional finance theories typically treat leases and debt as substitutes. However, the empirical findings on the relation between leases and debt are mixed. This paper reinvestigates this relation. I present a model to incorporate different theories on the substitutability and complementarity between leases and debt, and I test the model implications empirically in a GMM framework that simultaneously controls for endogeneity problems and firms' fixed effects. The findings suggest that leases and debt are substitutes instead of complements. I also investigate the variation in the substitutability between leases and debt, and find that in those firms with more growth options or larger marginal tax rates, or in those firms paying no dividends, the substitutability is more pronounced, i.e., the cost of new debt increases to a larger degree with extra leases.

Type
2005 Sharpe Award Winner
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 3 , September 2006 , pp. 709 - 731
Copyright
Copyright © School of Business Administration, University of Washington 2006

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