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Do operating leases expand credit capacity? Evidence from borrowing costs and credit ratings

Steve C. Lim, Steven Mann () and Vassil T. Mihov

Journal of Corporate Finance, 2017, vol. 42, issue C, 100-114

Abstract: We document that borrowing costs and credit ratings are less sensitive to off-balance sheet lease financing than to on-balance sheet debt financing, particularly for firms that are financially constrained and firms that have limited ability to use tax shields. This evidence is consistent with theoretical predictions based on tax benefits as well as bankruptcy costs. Our evidence on borrowing costs and credit ratings suggests that credit markets treat operating leases differently from balance sheet debt. Consistent with this interpretation, we document that firms closer to ratings borderlines lease more, particularly around the investment grade borderline.

Keywords: Operating leases; Off-balance sheet financing; Cost of capital; Credit capacity (search for similar items in EconPapers)
JEL-codes: G32 M41 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:corfin:v:42:y:2017:i:c:p:100-114