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Bankruptcy Costs and the Financial Leasing Decision

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  • V. Sivarama Krishnan
  • R. Charles Moyer
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    Abstract

    The theory of financial leasing views financial leases as substitutes for secured debt. Empirical studies have reported a high positive correlation between lease ratios and debt ratios and that lessors earn higher rates of return than lenders. These results contradict traditional leasing theory. They are explained in this paper by recognizing the role bankruptcy costs play in the lease/borrow decision and the nature of the assets to be acquired by a firm. Leasing is shown to involve lower bankruptcy costs than borrowing. Our empirical analysis shows that lessee firms have lower retained earnings relative to total assets, higher growth rates, lower coverage ratios, higher debt ratios, and higher operating risk than non-lessee firms. Lessee firms also have significantly lower Altman Z-scores, a measure of bankruptcy potential. Overall, our results indicate that as bankruptcy potential increases, lease financing becomes an increasingly attractive financing option. We also find evidence to support an industry clientele effect in financial leasing.

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    Bibliographic Info

    Article provided by Financial Management Association in its journal Financial Management.

    Volume (Year): 23 (1994)
    Issue (Month): 2 (Summer)
    Pages:

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    Handle: RePEc:fma:fmanag:krishnan94

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    Cited by:
    1. Chemmanur, Thomas & Jiao, Yawen & Yan, An, 2010. "A theory of contractual provisions in leasing," Journal of Financial Intermediation, Elsevier, vol. 19(1), pages 116-142, January.
    2. Landry, Suzanne & Fortin, Anne & Callimaci, Antonello, 2013. "Family firms and the lease decision," Journal of Family Business Strategy, Elsevier, vol. 4(3), pages 176-187.
    3. Du, Julan & Leung, Charles Ka Yui & Chu, Derek, 2013. "Return enhancing, cash-rich or simply empire-building? An empirical investigation of corporate real estate holdings," MPRA Paper 44253, University Library of Munich, Germany.
    4. Branch, Ben, 2002. "The costs of bankruptcy: A review," International Review of Financial Analysis, Elsevier, vol. 11(1), pages 39-57.
    5. Lee, Michael, 2010. "Auswirkung des Leasings auf die Fremdkapitalkapazität," Leasing - Wissenschaft & Praxis, Universität zu Köln, Forschungsinstitut für Leasing, vol. 8(2), pages 53-70.
    6. Jacques Sarremejeanne, 2011. "Les déterminants financiers des cessions-bail," Post-Print hal-00650571, HAL.
    7. Alain Capiez, 2000. "Evaluation du crédit-bail et risque de crédit," Post-Print halshs-00587435, HAL.
    8. Sharpe, Steven A. & Nguyen, Hien H., 1995. "Capital market imperfections and the incentive to lease," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 271-294.
    9. Eric Severin, 2008. "Neural Networks and their application in the fields of corporate finance," Working Papers hal-00325117, HAL.
    10. Ezzell, John R. & Vora, Premal P., 2001. "Leasing versus purchasing: Direct evidence on a corporation's motivations for leasing and consequences of leasing," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(1), pages 33-47.
    11. Marie Christine Deghaye-Filareto & Eric Severin, 2007. "Determinants of the choice leasing vs Bank Loan: evidence from the french sme by Kacm," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00204911, HAL.
    12. Gavazza, Alessandro, 2010. "Asset liquidity and financial contracts: Evidence from aircraft leases," Journal of Financial Economics, Elsevier, vol. 95(1), pages 62-84, January.

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