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Do operating leases expand credit capacity? Evidence from borrowing costs and credit ratings

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  • Lim, Steve C.
  • Mann, Steven C.
  • Mihov, Vassil T.

Abstract

We document that borrowing costs and credit ratings are less sensitive to off-balance sheet lease financing than to on-balance sheet debt financing, particularly for firms that are financially constrained and firms that have limited ability to use tax shields. This evidence is consistent with theoretical predictions based on tax benefits as well as bankruptcy costs. Our evidence on borrowing costs and credit ratings suggests that credit markets treat operating leases differently from balance sheet debt. Consistent with this interpretation, we document that firms closer to ratings borderlines lease more, particularly around the investment grade borderline.

Suggested Citation

  • Lim, Steve C. & Mann, Steven C. & Mihov, Vassil T., 2017. "Do operating leases expand credit capacity? Evidence from borrowing costs and credit ratings," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 100-114.
    • Handle: RePEc:eee:corfin:v:42:y:2017:i:c:p:100-114
    DOI: 10.1016/j.jcorpfin.2016.10.015
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    Cited by:

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    2. Kusano, Masaki, 2018. "Effect of capitalizing operating leases on credit ratings: Evidence from Japan," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 30(C), pages 45-56.
    3. Carlo Alberto Magni & Stefano Malagoli & Andrea Marchioni & Giovanni Mastroleo, 2020. "Rating firms and sensitivity analysis," Journal of the Operational Research Society, Taylor & Francis Journals, vol. 71(12), pages 1940-1958, December.
    4. Kusano, Masaki, 2020. "Does recognition versus disclosure affect risk relevance? Evidence from finance leases in Japan," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 38(C).
    5. Zhang, Ying & Zhai, Ling & Sun, Haijia, 2019. "Does the level of financial leasing matter in the impact of bank lending on economic growth: Evidence from the global market (2006–2016)," Finance Research Letters, Elsevier, vol. 30(C), pages 352-359.
    6. Francesco Bellandi, 2021. "Aircraft Wet Leases: Accounting Dissonance with Competitive Strategy and Travelers’ Perspectives," International Journal of Business and Management, Canadian Center of Science and Education, vol. 13(11), pages 214-214, July.
    7. Jui-I Chang & Chen-Ying Lee & Geng-Yu Lin, 2021. "Real earnings management and borrowing costs: The moderating effect of the directors’ and officers' liability insurance," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 11(5), pages 1-3.
    8. Papadimitri, Panagiota & Pasiouras, Fotios & Tasiou, Menelaos & Ventouri, Alexia, 2020. "The effects of board of directors’ education on firms’ credit ratings," Journal of Business Research, Elsevier, vol. 116(C), pages 294-313.
    9. Zhang, Shanshan & Liu, Chang, 2020. "State ownership and the structuring of lease arrangements," Journal of Corporate Finance, Elsevier, vol. 62(C).
    10. Ma, Mark (Shuai) & Thomas, Wayne B., 2023. "Economic consequences of operating lease recognition," Journal of Accounting and Economics, Elsevier, vol. 75(2).
    11. Begoña Giner & Francisca Pardo, 2018. "The Value Relevance of Operating Lease Liabilities: Economic Effects of IFRS 16," Australian Accounting Review, CPA Australia, vol. 28(4), pages 496-511, December.
    12. Jaspreet Kaur & Madhu Vij & Ajay Kumar Chauhan, 2023. "Signals influencing corporate credit ratings—a systematic literature review," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 50(1), pages 91-114, March.
    13. Chen, Ciao-Wei & Correia, Maria & Urcan, Oktay, 2023. "Accounting for leases and corporate investment," LSE Research Online Documents on Economics 117182, London School of Economics and Political Science, LSE Library.
    14. Kim, Tae-Nyun & Xie, Yutong, 2023. "Off-balance sheet disclosure and leverage adjustment speed," Finance Research Letters, Elsevier, vol. 51(C).
    15. Yongqiang Chu, 2020. "Collateral, Ease of Repossession, and Leases: Evidence from Antirecharacterization Laws," Management Science, INFORMS, vol. 66(7), pages 2951-2974, July.

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    More about this item

    Keywords

    Operating leases; Off-balance sheet financing; Cost of capital; Credit capacity;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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