Leasing and the allocation efficiency of finance

Weiwei Hu, Kai Li and Yiming Xu

Journal of Empirical Finance, 2023, vol. 74, issue C

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.

Keywords: Operating lease; Lease-induced debt; External financing; Misallocation of finance; Financial constraint (search for similar items in EconPapers)
JEL-codes: E22 E32 G32 G35 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:74:y:2023:i:c:s0927539823000932

DOI: 10.1016/j.jempfin.2023.101426

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