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Leasing and the allocation efficiency of finance

Author

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  • Hu, Weiwei
  • Li, Kai
  • Xu, Yiming

Abstract

This paper argues that leasing, as an important but often ignored source of external financing, facilitates the allocation efficiency of finance. We document a large overestimation of measured finance misallocation (Whited and Zhao, 2021) when lease-induced debt is ignored among US manufacturing firms. The losses in real value-added due to finance misallocation drop from 25% to 19% after appropriately adjusting for lease. This amounts to a 6-percentage-point reduction in measured misallocation inefficiency. In the time-series, this inefficiency reduction from lease-adjustment exhibits a strong countercyclical pattern. In the cross-section, we find such reduction presents asymmetric patterns for firms with different size — it is more salient within small firms than in large firms. Leasing improves the allocation of finance by raising the total amount of finance as well as by alleviating inefficient debt-equity combinations across firms. Finally, we find that factoring in lease-induced debt lowers both the level and dispersion of finance costs, consistent with the mitigation effect of lease-adjustment on finance allocation efficiency.

Suggested Citation

  • Hu, Weiwei & Li, Kai & Xu, Yiming, 2023. "Leasing and the allocation efficiency of finance," Journal of Empirical Finance, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:empfin:v:74:y:2023:i:c:s0927539823000932
    DOI: 10.1016/j.jempfin.2023.101426
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    More about this item

    Keywords

    Operating lease; Lease-induced debt; External financing; Misallocation of finance; Financial constraint;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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