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Determinants of leasing propensity in Canadian listed companies

  • Antonello Callimaci
  • Anne Fortin
  • Suzanne Landry
Registered author(s):

    Purpose – The purpose of this paper is to examine the relationship between a firm's propensity to lease and several firm characteristics: tax position, financial constraint, ownership structure, growth, and size. Design/methodology/approach – Controlling for industry, total lease share, operating and capital lease share ratios, obtained using an income statement approach, are regressed on a trichotomous tax variable, a dichotomous cash flow coverage ratio variable, debt over fixed assets, ownership concentration, market to book value of shares and the natural log of sales. Findings – Total lease share increases with leverage, tax position and growth; it decreases with cash flow coverage, ownership concentration and firm size. Results for operating lease share are similar to those for total lease share. In contrast, capital lease share decreases with tax position and increases with ownership concentration and size. Research limitations/implications – The results suggest that leasing offers added debt capacity and increases in financially constrained firms. Firms that pay high taxes seem to place more value on the constant stream of tax deductions from the rental payments than on deductions from decreasing interest costs and amortization. Finally, highly concentrated Canadian firms may use less leasing because they are more family-controlled. Originality/value – The literature offers mixed reasons for firms' decisions to lease or purchase assets. This study provides further evidence in a rich setting. In 2001, the Canadian tax authorities changed the tax treatment of leases, thus providing an opportunity to validate prior results on the impact of taxes on leasing. By including two different measures of financial constraint, this study disentangles the substitution and the added debt capacity hypotheses.

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    Article provided by Emerald Group Publishing in its journal International Journal of Managerial Finance.

    Volume (Year): 7 (2011)
    Issue (Month): 3 (June)
    Pages: 259-283

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    Handle: RePEc:eme:ijmfpp:v:7:y:2011:i:3:p:259-283
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    1. Mike Adams & Philip Hardwick, 1998. "Determinants of the leasing decision in United Kingdom listed companies," Applied Financial Economics, Taylor & Francis Journals, vol. 8(5), pages 487-494.
    2. Hamid Mehran & Robert A. Taggart & David Yermack, 1999. "CEO Ownership, Leasing, and Debt Financing," Financial Management, Financial Management Association, vol. 28(2), Summer.
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    4. Smith, Clifford W, Jr & Wakeman, L MacDonald, 1985. " Determinants of Corporate Leasing Policy," Journal of Finance, American Finance Association, vol. 40(3), pages 895-908, July.
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    9. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
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    12. Graham, John R., 1996. "Debt and the marginal tax rate," Journal of Financial Economics, Elsevier, vol. 41(1), pages 41-73, May.
    13. Graham, John R., 1996. "Proxies for the corporate marginal tax rate," Journal of Financial Economics, Elsevier, vol. 42(2), pages 187-221, October.
    14. M.Ameziane Lasfer & Mario Levis, 1998. "The Determinants of the Leasing Decision of Small and Large Companies," European Financial Management, European Financial Management Association, vol. 4(2), pages 159-184.
    15. 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.
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