Operating leases and the assessment of lease-debt substitutability

Citation

Beattie V, Goodacre A & Smith SJ (2000) Operating leases and the assessment of lease-debt substitutability. Journal of Banking and Finance, 24 (3), pp. 427-470. https://doi.org/10.1016/S0378-4266%2899%2900045-X

Abstract
Operating leases are estimated in the current paper to be approximately thirteen times larger than finance leases, on average. In recognition of this, the paper investigates the degree of substitutability between leasing and non-lease debt using a comprehensive measure of leasing, improving on the partial measures used in prior research. Operating lease liabilities are estimated using the 'constructive capitalisation' approach suggested by Imhoff, Lipe and Wright (1991, Accounting Horizons 5, pp. 51-63), modifed to incorporate company-specific and UK-relevant assumptions. The results imply that leasing and debt are partial substitutes, with £1 of leasing displacing approximately £0.23 of non-lease debt, on average, consistent with the argument that lessors bear some risks which are not inherent in debt contracts. These findings suggest that substitution effects are not uniform across lease types.

Keywords
Operating leases; Capital structure; Lease-debt substitutability; JEL classification: G32

Journal
Journal of Banking and Finance: Volume 24, Issue 3