Are Leases and Debt Substitutes? Evidence from Belgian Firms

Marc Deloof and Ilse Verschueren

Financial Management, 1999, vol. 28, issue 2

Abstract: Finance theory suggests that leases and corporate debt are substitutes. However, empirical evidence is mixed. The contribution of the present paper is to test the substitution hypothesis for a sample of 1,066 large Belgian non-financial firms for the 1992-1994 period, considering different debt categories, including intra-group loans. Belgium provides an interesting case to investigate the leasing decision because tax differences between lessor and lessee do not matter. We find that long-term bank debt and intra-group debt are substitutes for lease financing. However, we do not find a one-to-one relationship, which indicates that leases and long-term debt are not perfect substitutes.

Date: 1999
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