Essays on corporate leasing

• Main Author: Zhang, Na
• Language: English
• Published: University of British Columbia 2012
• Online Access: http://hdl.handle.net/2429/43693

Leasing is one of the most important sources of external finance to corporate firms. Better understanding of the determinants of corporate leasing behavior is critical for us to study the capital structure and investment of firms. However, it has been overlooked in the theoretical and empirical literature on investment. This thesis studies the determinants of corporate leasing. Each chapter presents a separate essay. The first chapter studies the role of uncertainty and financial constraint in understanding firms' leasing decisions. Although leasing costs more than owning capital in the long run, it provides operational flexibility for firms. In addition, leases are easier to finance than purchases. The benefits of leasing are particularly attractive to firms with high uncertainty and more financial constraints. This chapter develops a dynamic model and predicts that firms with high uncertainty and firms that are more financially constrained lease more of their capital than firms with low uncertainty and firms that are less financially constrained. Using data on publicly-traded firms in the U.S., this chapter provides evidence consistent with the prediction of the model. The second chapter documents that leasing is countercyclical over business cycles. Firms lease more during economic downturns, and are more willing to buy capital during up cycles. One key benefit of leasing is that leases are easier to finance than purchases. This benefit is particularly important to firms with financial constraints. Firms face tighter financing conditions during recessions. Therefore, leasing is more attractive during recessions. This chapter develops a model to explain the observed countercyclical pattern of leasing. The third chapter utilizes data from 81 countries to examine how legal environments affect firms' leasing behavior. The results suggest that leasing is less used in countries with weak legal environments. Firms in countries with weak legal environments tend to avoid the use of leasing contracts because the contracts are costly to enforce. I also find that leasing has a measurable impact on both firm growth and GDP growth. Leasing can help increase capital availability and improve operational efficiency, and thus may contribute to growth. The results provide a policy implication that possible adjustments in legal systems can facilitate the availability of leasing and thus may generate real economics gains.