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Do leases expand debt capacity?

James Schallheim, Kyle Wells and Ryan Whitby ()

Journal of Corporate Finance, 2013, vol. 23, issue C, 368-381

Abstract: Theoretically and empirically, debt and leases have been shown to be both substitutes and complements. To explore the relation, we divide our sample into two subsets: those that exhibit a complementary relation (43% increase debt after increasing leases), and those that exhibit a substitutionary relation (57% decrease debt after increasing leases). For complement firms, we find a significant negative relation between leasing and the firm's size, marginal tax rate, and z-score, consistent with “complementary” theories. For substitute firms, we find a positive and significant relation between leasing, the marginal tax rate and changes in cash. We also find a significant positive stock market reaction to the announcement of the SLB, which is stronger for the complement subset of firms.

Keywords: Leasing; Sale-and-leaseback; Capital structure; Debt (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1016/j.jcorpfin.2013.09.004

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Handle: RePEc:eee:corfin:v:23:y:2013:i:c:p:368-381