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Financial constraints and the decision to lease – Evidence from German SME

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  • Constantin F. Slotty

Abstract

The objective of this paper is to test the hypothesis that in particular financially constrained firms lease a higher share of their assets to mitigate problems of asymmetric information. The assumptions are tested under a GMM framework which simultaneously controls for endogeneity problems and firms’ fixed effects. We find that the share of total annual lease expenses attributable to either finance or operating leases is considerably higher for financially strained as well as for small and fast-growing firms – those likely to face higher agency-cost premiums on marginal financing. Furthermore, our results confirm the substitution of leasing and debt financing for lessee firms. However, we find no evidence that firms use leasing as an instrument to reduce their tax burdens.

Suggested Citation

  • Constantin F. Slotty, 2009. "Financial constraints and the decision to lease – Evidence from German SME," Working Paper Series: Finance and Accounting 205, Department of Finance, Goethe University Frankfurt am Main.
    • Handle: RePEc:fra:franaf:205
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    File URL: http://www.finance.uni-frankfurt.de/wp/1872.pdf
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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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