Leverage deviation from the target debt ratio and leasing

Hasibul Chowdhury, Shofiqur Rahman and Harikumar Sankaran

Accounting and Finance, 2021, vol. 61, issue 2, 3481-3515

Abstract: We find a negative association between the leverage deviation and leasing intensity, implying that firms actively use leasing as a source of financing when faced with a leverage deviation. This negative relation is more pronounced for firms that are underleveraged, are financially constrained, and have a high likelihood of bankruptcy, and weaker for firms with a greater need to preserve debt capacity. We attribute these incentives to distinct features of the lease contract that separate it from secured debt contracts. Overall, our results are consistent with the substitution effects of lease and debt.

Date: 2021
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https://doi.org/10.1111/acfi.12710

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