Bankruptcy Costs and the Financial Leasing Decision

Bankruptcy Costs and the Financial Leasing DecisionAuthor(s): V. Sivarama Krishnan and R. Charles MoyerSource: Financial Management, Vol. 23, No. 2 (Summer, 1994), pp. 31-42Published by: Wiley on behalf of the Financial Management Association InternationalStable URL: http://www.jstor.org/stable/3665737 .

Accessed: 02/10/2013 20:51

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].

.

Wiley and Financial Management Association International are collaborating with JSTOR to digitize, preserveand extend access to Financial Management.

http://www.jstor.org

This content downloaded from 146.232.129.75 on Wed, 2 Oct 2013 20:51:33 PMAll use subject to JSTOR Terms and Conditions

http://www.jstor.org/action/showPublisher?publisherCode=black

http://www.jstor.org/action/showPublisher?publisherCode=fma

http://www.jstor.org/stable/3665737?origin=JSTOR-pdf

http://www.jstor.org/page/info/about/policies/terms.jsp


Bankruptcy Costs and the Financial Leasing Decision

V. Sivarama Krishnan and R. Charles Moyer

V. Sivarama Krishnan is Assistant Professor of Finance at Cameron University, Lawton, Oklahoma. R. Charles Moyer is Integon Professor of Finance in the Babcock Graduate School of Management at Wake Forest University, Winston-Salem, North Carolina.

Abstract: The theory of financial leasing views financial leases as substitutes for secured debt. Empirical studies have reported a high positive correlation between lease ratios and debt ratios and that lessors earn higher rates of return than lenders. These results contradict traditional leasing theory. They are explained in this paper by recognizing the role bankruptcy costs play in the lease/borrow decision and the nature of the assets to be acquired by a firm. Leasing is shown to involve lower bankruptcy costs than borrowing. Our empirical analysis shows that lessee firms have lower retained earnings relative to total assets, higher growth rates, lower coverage ratios, higher debt ratios, and higher operating risk than non-lessee firms. Lessee firms also have significantly lower Altman Z-scores, a measure of bankruptcy potential. Overall, our results indicate that as bankruptcy potential increases, lease financing becomes an increasingly attractive financing option. We also find evidence to support an industry clientele effect in financial leasing.

0 This paper re-examines the lease/borrow decision, giving explicit recognition to the role bankruptcy costs play and to the relative transactions costs of leasing and borrowing. Our focus is on noncancellable, long-term financial leases because they are most nearly the equivalent of debt financing. We limit our consideration of financial leasing to capital leases, as defined in FASB Statement #13. Because capital leases generally do not meet the lease definition require- ments of the Internal Revenue Service (Revenue Procedure 75-21), they provide a unique opportunity to test non-tax theories of leasing. The paper emphasizes lessee firm characteristics that induce significant leasing behavior, rather than the characteristics of specific lease contracts. Leasing is shown to have lower expected bankruptcy costs to the lessor than borrowing has to the lender, resulting in lower financing costs for the lessee than the borrower, ceteris paribus. Off-

setting the lower bankruptcy costs associated with leasing are the generally higher transactions costs of leasing relative to borrowing. The tradeoff between bankruptcy costs and transactions costs may explain the preference for borrowing

by more creditworthy firms and for leasing by less creditworthy firms.

We find support for the bankruptcy cost argument as an explanation for the lease versus borrow decision. Our results are consistent with a pecking order theory of financing where firms with greater financial distress potential and high debt leverage, ceteris paribus, may find financing alternatives to leasing unavailable. Also, we find that leasing is a significantly less common method of financing for firms in manufacturing industries, where asset specificity is greater, than for firms in most other major industry groupings.

I. Literature Review The theory of financial leasing (e.g., Bower (1973),

Brealey and Young (1980), Brick, Fung, and Subrahmanyam (1987), Lewellen, Long, and McConnell (1976), Miller and

Upton (1976), and Myers, Dill, and Bautista (1976)) traditionally has focused on the differential tax position of the lessee and the lessor as the primary rationale for leasing.1 Brick, Fung, and Subrahmanyam (1987) extended the tax-based analysis to consider economies of scale in This research was supported, in part, by the Integon Research Fund at Wake

Forest University, the Institute for Banking and Financial Studies at Texas Tech University, and the Case Western Reserve Summer Research Grant Program. We appreciate the comments from participants in the finance workshops at the University of North Carolina-Chapel Hill, Wake Forest University, Texas Tech University, and Case Western Reserve University, from Marion W. Benfield, Jr., Ralph Peeples, the former Editor, James Ang, and three anonymous reviewers.

IThis statement assumes that a financial intermediary is the lessor. The analysis for the lessor must be modified if the lessor is the manufacturer of the asset because of the manufacturer's ability to defer taxes on the profits from the production of the asset. See Brick. Fung. and Subrahmanyam (1987) for a discussion of this point.

Financial Management, Vol. 23, No. 2, Summer 1994, pages 31-42.



32 FINANCIAL MANAGEMENT / SUMMER 1994

structuring lease contracts and the cost of managing cash flows in the presence of default risk and interest rate

uncertainty. De la Torre and Benjamin (1991), Krahan and Meran (1987), and Lease, McConnell, and Schallheim (1990) consider the role of information asymmetries between the lessee and the lessor regarding the residual value of the leased asset as a further explanation for lease financing.

Empirical studies of leasing, including Crawford, Harper, and McConnell (CHM) (1981), Gudikunst and Roberts (1978), Roenfeldt and Henry (1979), Schallheim, Johnson, Lease, and McConnell (1987), and Sorensen and Johnson (1977) have reported high ex ante returns for lessors, and by implication, high lease rates paid by lessees. For example, Crawford, Harper, and McConnell found that lessors' ex ante rates of return were significantly higher than the yield on BBB-rated bonds during the same time period. Lease, McConnell, and Schallheim (1990) documented high realized returns on financial leasing contracts, although the realized returns were less than the expected returns. Further, they found that realized salvage values tended to exceed

greatly the actual salvage values on which the lease contract was based.

In addition, Ang and Peterson (1984) and Bowman (1980) found that debt and lease financing were significantly, positively correlated, implying that debt and lease financing are complements not substitutes. Ang and Peterson found that tax rate differences between leasing and non-leasing firms cannot explain the complementary relationship between debt and lease financing. Marston and Harris (1988) provide one possible explanation for this apparent anomaly. They studied changes in the debt ratio and lease ratio for individual firms over time and found them to be inversely related--confirming that debt and lease financing are substitutes. That is, for each firm, debt and lease financing are substitutes, but firms employing lease financing typically use higher levels of debt compared to firms that do not use lease financing.

Finucane (1988) also found evidence of a positive relationship between debt and lease financing. Finucane shows that firms in certain industries, including air transport and retailing, rely more heavily on lease financing than others. A cross-sectional analysis revealed that the lease ratio (capitalized leases to total assets) is related to several variables, including the level of mortgage debt and the bond rating for the firm. Firms with lower bond ratings were found to lease more frequently--a result that is consistent with our expected bankruptcy cost hypothesis. Tax-related factors were not found to be important in explaining the level of leasing by a firm.2 Vora and Ezzell (1991) found significant

tax rate differences between lessees and lessors, although they found that the lessee's tax rate is not necessarily lower than the respective lessor's.

Smith and Wakeman (1985) offer a comprehensive analysis of the rationale for leasing that helps to explain many of these seemingly anomalous empirical findings. For example, the high rates of return expected and actually earned by lessors may be attributed to either a comparative advantage of the lessor in disposing of assets at the termination of a lease or the ability of the lessor to exercise market power and to price discriminate among various asset user groups. Smith and Wakeman argue further that the Ang and Peterson finding that leasing and borrowing are complementary can be explained across firms by examining the characteristics of firms' investment opportunity sets.

Lewis and Schallheim (1992) model the debt/lease financing decision as a substitution between debt and non-debt tax shields. In their model, non-debt tax shields are sold, via leasing, thereby reducing the potential redundancy with interest deductions and making the marginal value of debt positive. The lessee responds by issuing additional debt, which accounts for the positive relationship between debt and lease financing. The benefit from leasing in this model is realized even if the marginal tax rate is the same for the lessee and lessor.

In the next section we present a non-tax rationale for financial (capital) leasing that offers additional insight regarding the relationship between debt and lease financing.

II. A Non-Tax Rationale for Leasing Barro (1976), Benjamin (1978), Jackson and Kronman

(1979), Scott (1977), and Smith and Warner (1979) suggest that secured debt is a financial contracting mechanism aimed at reducing the potential agency costs of debt. Stulz and Johnson (1985) formalize the earlier analysis and show that

2Because Finucane looked only at "capital" leases, as defined by FASB Statement #13, tax factors would not be expected to be important because the Internal Revenue Service treats most capital leases as installment sales contracts for tax purposes. Capital leases, from a financial reporting perspective, meet one of the following four tests: (1) ownership is transferred to the lessee at the end of the lease term or during the lease term, (2) the lease contains a bargain purchase option, (3) the lease equals at least 75% of the estimated economic useful life of the asset, and (4) the present value of the minimum lease payments equal at least 90% of the fair value of the leased property. Tests (1) and (2) disqualify a "lease" from the perspective of the IRS. Because the lessor must maintain a minimum equity position in the asset of no less than 10% of the asset's original cost, the application of test (4) also will disqualify a capital lease for tax purposes. Finally, if a lease term is 80% or more of the useful life of the asset, it will be disqualified for tax purposes. Hence only leases with terms between 75% and 80% of the useful life would qualify as leases both for tax and financial reporting purposes, if they did not violate any other IRS test.



KRISHNAN & MOYER / BANKRUPTCY COSTS AND THE FINANCIAL LEASING DECISION 33

secured debt reduces potential risk-taking behavior of the borrower and thus reduces monitoring costs to the lender. Leeth and Scott (1989) found that secured debt is positively associated with loan default probability, asset marketability, and loan size. Retaining the option to issue secured debt also controls the underinvestment problems identified by Myers (1977).

Many of the properties of secured debt can be extended to financial (capital) leasing, because capital leases impose consequences on a firm that are similar to secured debt financing. Following Leeth and Scott (1989) and Scott (1977), it can be argued that leases have lower expected bankruptcy costs for the lessor than secured debt has for the lender, thereby making leasing a preferred financing alternative for firms with a higher potential for financial distress. The legal treatment of the claims of lessors is different from the treatment of the claims of secured lenders in bankruptcy. The claims of secured creditors are diluted

considerably more than comparable claims of lessors in

bankruptcies followed by reorganization. A debtor may file a petition for relief either under Chapter 11 of the Bankruptcy Code for the purpose of reorganization or under Chapter 7 for liquidation. Upon filing the petition, the debtor obtains immediate relief in the form of an automatic stay that prevents creditor actions or enforcements against the debtor. While the stay is in force, creditors (and lessors) are not able to enforce liens. The stay also prevents any act to obtain possession of any property, regardless of who holds the title. The stay is terminated at the end of 30 days unless the bankruptcy court orders its continuance. The treatment of lessors and secured creditors appears to be identical at this

stage. In subsequent states of the reorganization proceedings, however, there are significant differences.

In theory, the Bankruptcy Code gives priority to the claims of the secured lender.3 The claims of the secured lender enjoy priority in the distribution of the proceeds of the collateral. If the value of the collateral is less than the amount of the debt, the secured lender is entitled to the value of the collateral, and the difference is treated as an unsecured claim. The secured creditor may suffer when the asset is retained in reorganization. In most reorganizations, the secured creditor must settle for an exchange of securities that erodes the value of the secured creditor's claims. Warner (1977) discusses the implications of this treatment for the period prior to the

passage of the Bankruptcy Reform Act of 1978 (the " 1978" Act). The 1978 Act has improved the protection available to secured creditors, but protection of secured creditors is substantially less than that afforded lessors in similar circumstances.

A lessor also suffers an erosion of rights in the event of bankruptcy by the lessee. Normally, it is not possible to take enforcement action during the period of the automatic stay. Furthermore, the event of bankruptcy itself does not represent a default on the terms of the lease, per se. The 1978 Act provides that the debtor or the bankruptcy court can enforce continuance of a lease. While a debtor is in reorganization, the debtor must agree to assume the lease, subject to bankruptcy court approval, within 60 days of the date the bankruptcy petition is filed, although this period may be extended by the court.4 However, the debtor may not assume the lease if there has been any default, unless the debtor (1) cures, or provides adequate assurance that the debtor will promptly cure, the default; (2) compensates, or provides adequate assurance that the debtor will promptly compensate, the lessor for any actual pecuniary loss arising from such default; and (3) provides adequate assurance of the future performance under the lease contract. Curing the default requires payment to the lessor of all past-due claims and compliance with any other obligations. The debtor must guarantee that the lease payments will be kept current and that the lessee's other obligations under the lease will be fulfilled (Mapother (1984)). Also, the Bankruptcy Code gives the debtor the right to reject any executory contract (including leases) within 60 days of filing.

In the event of a default on a lease prior to bankruptcy, a lessor is entitled to recover damages consistent with the damages-on-default provision contained in the lease. This provision normally takes the original cost of the asset, subtracts the expected salvage value at the termination of the lease, and applies some form of accelerated depreciation over the remaining amount to determine the amount of recovery.5

3Barrett and Sullivan (1988) and Eberhart, Moore, and Roenfeldt (1990) report an increasing trend toward violations of the absolute priority rule (APR), resulting in shareholders and junior creditors receiving valuable assets in reorganizations, while senior claimants receive only partial settle- ments of their claims. The reality of violations of the APR further increases expected bankruptcy costs associated with secured debt relative to lease financing.

4In early 1991, Continental Airlines sought to have over $100 million of its lease obligations treated as debt in the administration of its Chapter 11 bankruptcy proceeding. An early Delaware bankruptcy court opinion supported this argument and ruled that some of these sale and leaseback transactions really represented debt. That initial ruling was overturned on appeal. Attempts such as this to undermine the legal standing of lessors in bankruptcy proceedings can be expected to reduce substantially the willing- ness of lessors to provide financing to firms in financial difficulty.

5If a lease fails to include a provision on damages, Article 2A-528, " Lessor's Damages for Non-acceptance, Failure to Pay, Repudiation, or Other De- fault," from the Uniform Commercial Code applies. This provision was added to the Code in 1987. The Uniform Commercial Code applies in 39 states and the District of Columbia. This provision permits the lessor to

recover from the lessee as damages for default (i) accrued and unpaid rent as of the date of default if the lessee has never taken possession of the goods, or, if the lessee has taken possession of the goods, as of




In the case of a defaulted lease for a firm in bankruptcy, the lessor's maximum claim for damages is equal to the arithmetic sum of the the lease payments remaining under the terms of lease, in the case of personal property (plus the

right to reclaim the property). For leased real property, the claim is limited to a maximium of three years of lease payments. Thus, in general, the recovery to a lessor is superior to recoveries from a defaulted loan, which are limited to the outstanding balance due plus accrued and unpaid interest (through the date the bankruptcy petition is filed).

Another important advantage lessors enjoy relative to secured lenders is the superior claim of lessors over lenders prior to bankruptcy. If a lessee defaults on the terms of the lease, the lessor normally can seize the asset with a minimum of legal costs. In these cases, the lessor will avoid any losses and delays that may arise from the bankruptcy and reorganization process.

The preceding discussion leads to the conclusion that lease financing has lower associated bankruptcy costs to the lessor than secured debt has to the lender. Because the lessee (borrower) must compensate the lessor (lender) for expected bankruptcy costs, a firm with a significant bankruptcy potential will find lease financing to be available at a lower cost than would be true for secured debt financing. In such circumstances, lease financing may be the only form of long-term financing available to a high-risk firm.6

Offsetting these benefits from leasing is the fact that leases (except for simple, standard, typically low-value operating leases) are more complex contracts than are required if an asset is owned and financed with secured debt.

Lease contracts are a combination of (1) an agreement specifying the rights and responsibilities of the lessor and the lessee with respect to the use of the asset and (2) a financing contract. Responsibilities for maintenance, payment of taxes, and the like must be carefully specified in the lease contract and monitored by the lessor. Liabilities associated with the use of the asset also must be addressed in a lease contract. If a transfer of tax benefits is desired, lease contracts must be carefully drawn to meet IRS guidelines. Furthermore, many (financial) leases are structured as leveraged leases, resulting in two complex contracts-the lease and the debt contract between the lenders and the lessor.

Schallheim, Johnson, Lease, and McConnell (SJLM) (1987) found that lease yields are a positive function of the transactions costs of negotiating and writing a lease. For the largest firms in their sample, a firm size that most closely approximates the firm sizes represented in our data, their evidence indicates positive spreads between lease yields and "Aaa" borrowing costs. The fact that these firms chose to lease assets rather than to borrow to buy them indicates that other benefits, such as capital market access and lower bankruptcy costs, play an important role in the leasing decision. SJLM also found that lease yields were an inverse function of the availability of reliable information about the lessee firm and a positive function of the default potential of the lessee firm.

In addition to the transactions costs associated with establishing a lease contract, there are other significant potential transactions costs over the life of the lease, as compared with the costs of ownership. For example, if an asset user wishes to dispose of an owned asset because the asset is no longer productive, the process of asset disposal involves a straightforward decision to sell the asset.7 In contrast, in the case of assets acquired via a noncancellable financial lease,8 the lessee must negotiate with the lessor for permission to cancel the lease and for the cost of cancellation. These negotiations may be complicated by differing perceptions as to the salvage value of the asset at the time of lease termination. Alternatively, the lessee must get permission from the lessor to sublease an asset. The frequency of lease prepayment and cancellation may be relatively large. For example, Lease, McConnell, and

Schallheim (1990) found that for a sample of 137 completed,

the date the lessor repossesses the goods...,(ii) the present value as of the date determined under clause (i) of the total rent for the then remaining lease term of the original lease agreement minus the present value as of the same date of the market rent at the place where the goods are located computed for the same lease term, and (iii) any incidental damages allowed under Section 2A-530, less expenses saved in consequence of the lessee's default.

This section goes on to state that If the measure of damages (as discussed above) is inadequate to put a lessor in as good a position as performance would have, the measure of damages is the present value of the profit, including reasonable overhead, with any incidental damages allowed under Section 2A- 530, due allowance for costs reasonably incurred and due credit for payments or proceeds of disposition.

6The total cost of lease financing includes both the explicit cost charged by the lessor and the implicit costs of the lease. For example, if a lessor repossesses key assets, that act may force the lessee into bankruptcy. However, a repossession of key assets by a lessor is most likely to occur in the case of a default on making lease payments. If the firm cannot make lease payments for its key assets on time, it is unlikely that it would be able to make required principal and interest payments under a secured loan had these assets been financed with debt. In either case, bankruptcy and/or reorganization is the likely outcome. In fact, a lessor's attempt to seize a key asset may precipitate the filing of a bankruptcy petition.

'If the asset is the source of security for a loan, the asset owner must secure the permission of the lender before selling the asset. This normally is easy to accomplish if the asset owner agrees to retire an equivalent amount of the secured debt.

8Financial leases may be cancellable, but such leases typically contain substantial cancellation penalties, much like the early redemption provision in a debt contract.




small financial leases (mean size of about $75,000), 31.4% were prepaid and cancelled prior to the end of the lease

period, 19% defaulted, and 49.6% were full-term leases. The lack of flexibility in varying a firm's asset mix if assets are leased may be the largest source of a transaction cost differential between leasing and ownership. Accordingly, financial leases can be expected to have higher transactions/contracting costs than secured borrowing.

It is not possible to derive exact forms of transactions cost functions for secured debt and financial leases. However, based on the preceding discussion, we expect transactions costs to be greater for incremental lease financing than for incremental debt financing, ceteris paribus. In addition, we

expect that transactions costs are an increasing function of the amount of incremental lease financing, with a decreasing marginal cost. Incremental transactions costs associated with secured debt financing also are expected to be an increasing function of the amount of incremental debt, with a decreasing marginal cost. However, for any amount of financing, transactions costs should be more for leasing than for secured debt financing, ceteris paribus.

In general, the transactions cost elements are expected to dominate in the lease-borrow analysis when a firm has a low probability of firm failure and a small incremental amount of financing is contemplated. Under these circumstances significant amounts of lease financing are unlikely. As the

potential for firm failure increases, the cost balance is

expected to shift in favor of leasing, as the higher transactions costs of leasing are offset by the lower expected bankruptcy costs with leasing relative to secured borrowing.

Ill. Hypotheses The analysis presented above suggests that firms that use

lease financing (non-cancellable financial leases) have a greater potential for bankruptcy than non-leasing firms, ceteris paribus.9

A related hypothesis is that lease financing will be used more often by firms in industries that make use of non-firm-specific assets, such as retail property, transportation equipment, and mining equipment, ceteris paribus. This hypothesis follows from Smith and Wakeman's (1985) argument that the leasing of organization-specific assets is unlikely because of the high costs of negotiation, administration, and enforcement, due to conflicting objectives of the lessors and the lessees. Similarly, Klein, Crawford, and Alchian (1978) argue that

firm-specific assets expose a lessor to the risk of exploitation by the lessee because there is no good alternative use for the assets if the lessee refuses to renew the lease, disputes the lease payments, or declares bankruptcy.l0 Consequently, firm-specific assets are less likely to be offered for leasing than assets that are not firm-specific. The firm-specific asset problem is exacerbated in the case of firms with a high potential for financial distress because of the limited value of such assets in the event of firm failure.

We hypothesize that firms in manufacturing industries make greater use of firm-specific assets than in other major industry groupings. For example, mining, construction, and transportation equipment normally can be transferred from one firm to another with little needed modification by the acquiring firm. Similarly, retail and wholesale assets (primarily buildings) often can be adapted to multiple uses. Finucane (1988) found evidence of significant and persistent lease usage in the retailing and air transport industries.

One measure of asset specificity is the ratio of research and development (R&D) expense to sales or to the market value of total assets. R&D expenditures are made primarily to create technologies and products that are unique to a firm. Because of their unique characteristics, assets created through the R&D process are less likely to have a meaningful recovery value in the case of default, thereby making them less suitable for lease financing. Using the COMPUSTAT database, we obtained a sample of 2,256 firms with sales in excess of $15 million over the period 1984-1986. We found that the mean level of R&D expense to sales for manufacturing firms was 4.65%, as compared to ratios of about 1% or less in all other major industry groupings, except for service industries.11 Similar results are found for the ratio of R&D expense to assets. Summary data for these ratios are provided in Table 1. Accordingly, we use industry classifications as a proxy for leasing potential due to the presence of firm-specific assets.

Rapidly growing firms also can be expected to make greater use of lease financing, when the choice is between

9Slovin, Sushka, and Polonchek (1990) found that announcements of sale and leaseback transactions by financially weak bank holding companies elicited significant negative announcement period returns, a result consistent with the bankruptcy hypothesis.

'0In a sense, a bilateral monopoly situation is created because the lessee also is subject to exploitation by the lessor. For example, the lessor may fail to maintain an asset properly, thereby increasing the effective rent in a way unanticipated by the lessee at the inception of the lease. Also, the lessor could refuse to renew a lease or demand a high lease payment if the lessee is solely dependent on the leased asset. However, in the case of noncancellable financial leases, the vulnerability of the lessee is significantly less than that of the lessor, because the lessor already has made a long-term commitment. In contrast, the lessor remains at risk for a potential default by the lessee. These costs normally would be borne by the lessee in the form of the lease rate quoted by the lessor.

'The $15 million cutoff was used to eliminate new firms in research-inten- sive industries, which often report R&D as a percent of sales in excess of 100%. If all firms in the COMPUSTAT database are included in sample, the ratio of R&D to sales increases to 15.9% in the manufacturing industries.




Table 1. Research and Development (R&D) Expenditures Relative to Sales and Assets for COMPUSTAT Universe of Firms with Sales Greater than $15 million by Industry Groups, 1984-1986

Firms Reporting Standard Standard Industry Group Total Firms R&D Expense Mean RD1a Deviation RD1 Mean RD2b Deviation RD2

Mining 96 20 0.0118 0.0186 0.0073 0.0108

Construction 57 9 0.0040 0.0056 0.0054 0.0062

Manufacturing 1,257 846 0.0465 0.0804 0.0311 0.0282

Transportation 73 1 0.0073 0.0054

Wholesale Trade 339 50 0.0024 0.0060 0.0017 0.0040

Retail Trade 182 117 0.0002 0.0014 0.0004 0.0024

Services 252 107 0.0697 0.1015 0.0359 0.0428

aRD 1 = R&D expenditures divided by sales. bRD2 = R&D expenditures divided by total assets, where total assets are defined in market value terms for the equity-financed portion of the asset base. Similar results are found using the book value of all assets.

lease financing and debt financing.12 Myers (1977) shows that growth opportunities are less likely to be financed with debt because of the investment disincentive and asset

substitutability problems. Lease financing solves these

problems because a lease is associated with a specific asset. Furthermore, rapidly growing firms tend to be relatively cash

poor. Because of this, lease financing may be preferred because of the lower required down payment (equity commitment), relative to debt financing, at the inception of the transaction. The "down payment" with leasing normally is equal to only one month's lease payment, an amount that is less than the typical loan down payment. Hence, lease financing often may be the only financing alternative to

equity for rapidly growing firms. In addition to testing the bankruptcy, asset specificity, and

firm growth hypotheses, we also provide some evidence

concerning the role taxes play in the leasing decision.

IV. Data and Methodology The Disclosure Database (July 1987) is the primary data

source for the empirical analysis. These data are

supplemented with COMPUSTAT data for the calculation of the growth rate and risk variables and with data obtained from company 10K and annual reports. The companies included in our sample met the following criteria:

1. Assets greater than $200 million13

2. No holding companies, in order to avoid duplication with subsidiaries

3. No regulated utility and financial firms

The final sample includes 410 firms reporting no use of lease financing on their balance sheets and 98 firms reporting capital leases on their balance sheets. All income statement and balance sheet items, except those used to calculate the 1984 market-to-book ratio, were averaged over three years (1984 through 1986) to develop an arithmetic average income statement and balance sheet that is the source of data for the ratio calculations.14

Previous studies, including Altman (1968), Beaver (1966, 1968), Moyer, Marr, and Chatfield (1987), and Ohlson (1980) suggest that measures of current and accumulated past performance, measures of debt servicing capacity, leverage measures, and operating risk measures are useful in

forecasting a firm's likelihood of bankruptcy. We use Earnings Before Interest and Taxes/Total Assets (EBIT/TA) as the measure of current profitability. Retained

Earnings/Total Assets (RETEARN) measures accumulated

past profitability,15 and Market Value of Common

Equity/Book Value of Common Equity (MBRATIO) measures the market's assessment of firm performance. Earnings Before Interest and Taxes/Total Interest (EBITCOVR) measures the firm's ability to service its debt

12It can be argued that equity financing is even more likely than lease financing under these circumstances. We do not test that proposition because we are dealing with data concerning actual lease financing undertaken by a firm.

13Firms with assets of less than $200 million had numerous missing data items.

14The averaging procedure is designed to reduce measurement noise inher- ent in one year's financial statement data. The empirical tests reported in the paper were also conducted using each individual year of data, with no significant differences in the overall results. 15The ratio of retained earnings to total assets also may serve as a proxy for the age of a firm, and accordingly, its riskiness. This ratio reflects multiple dimensions of the bankruptcy potential of a firm, since most firm failures occur in the early years of the firm's existence when growth rates tend to be high and the demands for capital, relative to firm size, are large.




obligations. Long-Term Debt/Total Assets (LDA) measures the firm's use of financial leverage. The Coefficient of Variation of EBIT (EBITVAR) measures the operating risk

facing a firm.16 Firms that make use of lease financing are

expected to have greater bankruptcy risk as measured by the

foregoing variables. In addition to these variables, we also calculated the

Altman Z-score (1968) for the leasing and non-leasing firms. The Altman Z-score provides a singular measure of financial distress potential, and thus eliminates the potential for

collinearity among several of the univariate measures

employed, such as EBITCOVR, RETEARN, and LDA. Firms that make use of lease financing are expected to have lower Z-scores, indicating a higher probability of firm failure.

In testing the asset-specificity hypothesis, we use

categorical industry variables, with the expectation that the incidence of leasing will be lower in manufacturing industries than in other industry categories. The test of the

growth hypothesis is conducted using Growth in Assets (ASSETGROW, defined as the geometric mean growth rate over the previous 5 years based on asset data obtained from COMPUSTAT). Finally, the effective tax rates of leasing and non-leasing firms are compared. The tax rate is

computed as the provision for income taxes as reported on the income statement less the increase in deferred tax divided

by pretax income before extraordinary items. Firms

reporting negative income are deleted from the sample for tests of the tax rate variable.

V. Discussion of Empirical Results The subsamples of leasing and non-leasing firms total 98

and 410, respectively. The mean value of the ratio of capital leases to total assets for leasing firms is 4.9% with a standard deviation of 5.2%.

A. Test for Industry Effects The sample initially was divided into seven broad

industry groups, and the frequency distributions across the different groups were then determined. A Chi-square test, as reported in Table 2, indicates rejection of the null hypothesis of no significant difference across groups. As expected, the use of leasing in the manufacturing industries is low, as compared with other industries. Only 10.9% of the manufacturing firms reported the use of lease financing, as compared with an overall average of 19.3%. Consistent with the expectations of Smith and Wakeman (1985) and the findings of Finucane (1988), there is a relatively high use of lease financing in the transportation, retail trade, wholesale trade, and mining industries. The absence of any reported use of lease financing in the construction industry may reflect the tendency for firms in that industry to make use of short-term, cancellable operating leases for much of their construction equipment.

Table 3 presents the lease ratios (LRA), calculated by dividing capitalized leases by total assets, for major industry groupings. The results in Table 3 confirm the heavy use of leasing in the transportation industry and the low use of leasing in manufacturing. Moderate lease usage is evident in

Table 2. Distribution of Leasing versus Non-leasing Firms by Industry Groups, 1984-1986

Leasing Non-leasing Total

Industry Group Number Percent Number Percent Number

Mining 13 30.2 30 69.8 43 Construction 0 0.0 12 100.0 12

Manufacturing 34 10.9 278 89.1 312

Transportation 10 40.0 15 60.0 25 Wholesale Trade 5 22.7 17 77.3 22 Retail Trade 32 58.2 23 41.8 55

Services 4 10.3 35 89.7 39 Total 98 19.3 410 80.7 508

Chi-square statistic = 82.8

p-value = 0.0001

'6Non-operating pretax income was excluded when computing the coefficient of variation of EBIT.




Table 3. Lease Ratios by Industry Groups, 1984-1986

Industry Group Number of Firms LRAa

Mining 13 0.05

Manufacturing 34 0.03

Transportation 10 0.12 Wholesale Trade 5 0.05 Retail Trade 32 0.05 Services 4 0.09 Total 98 0.05

aLRA = capitalized leases/total assets

the retailing, wholesaling, and mining industries. The high lease usage reported in the service industries reflects the

diversity of firms in that industry and the small number of

leasing firms in the sample. The firms that use lease financing in this industry have used it extensively, but as shown in Table 2, only 10.3% of the firms in the industry used any lease financing at all.17

B. Univariate Hypothesis Tests

Table 4 summarizes the Mann-Whitney tests for differences in the values of the bankruptcy and growth potential variables between the leasing and non-leasing firms. Average tax rate differences between leasing and

non-leasing firms also are provided. A Komolgorov test for

normality revealed that none of the variables has a normal distribution. Also, many of the variables have extreme

(outlier) values. Accordingly, the nonparametric Mann-Whitney test is preferred to the standard t test in

performing the difference of means tests. All of the univariate tests for differences are one-tailed. A positive Mann-Whitney test (T) statistic indicates that the difference in the mean between the leasing and non-leasing groups is in the direction hypothesized above. A negative Mann-Whitney T statistic supports the null hypothesis.

Among the performance measure variables, the ratio of retained earnings to total assets (RETEARN) has a

significantly lower mean value (at the 0.01 level) for the

leasing firms. The market-to-book ratio (MBRATIO) difference is significant at the 0.10 level. However, the ratio of EBIT to total assets (EBIT/TA) has a sign opposite that

Table 4. Univariate Tests of Bankruptcy and Growth Potential Hypotheses

Mean Value Mann-Whitney Variablea Leasing Non-leasing T p-value

RETEARN 0.268 0.341 3.63 <0.01

MBRATIO 1.450 1.650 1.30 0.10

EBIT/TA 0.108 0.100 -1.36 0.92

EBITCOVR 6.375 11.349 1.00 0.16

LDA 0.200 0.190 1.31 0.18

EBITVAR 84.260 56.090 2.13 0.02

ASSETGROW 1.180 1.130 3.03 <0.01

Z-SCORE 5.670 10.860 1.67 0.05

AVERAGE 0.3195 0.3193 0.19 >0.99 TAX RATE

aRETEARN = retained earnings/total assets; MBRATIO = market-to-book ratio, year-end 1984; EBIT/TA = EBIT/total assets; EBITCOVR = EBIT/total interest charges; LDA = long-term debt/total assets; EBITVAR = coefficient of variation of EBIT over the previous 10 years; ASSETGROW = geometric mean 5-year growth rate in fixed assets; Z-SCORE = multivariate Altman Z-score values; and AVERAGE TAX RATE = tax paid/income before extraordinary items. All values shown are 3-year averages for the period 1984-86, except for the MBRATIO.

hypothesized.18 Overall, with respect to the performance measures, it appears that leasing firms have lower relative levels of accumulated past earnings, a lower relative market valuation, and somewhat higher current earnings than

non-leasing firms. The ratio of EBIT to total interest (EBITCOVR) provides

an indication of the ability of a firm to meet its ongoing debt

obligations. EBITCOVR is lower (6.375 times) for leasing firms than for non-leasing firms (11.349). The coefficient of variation of EBIT (EBITVAR) indicates the operating risk

facing a firm. Lessee firms have more operating risk as measured by EBITVAR than non-leasing firms. The difference is significant at the 0.02 level.

The univariate analysis also indicates that lessee firms tend to have higher debt ratios, as defined by the ratio of

long-term debt to total assets (LDA). This result is similar to the results in Ang and Peterson (1984), but the difference in Table 4 is significant only at the 0.18 level. When capitalized leases are added to the numerator of the LDA ratio, the

leverage difference between leasing and non-leasing firms increases substantially (0.25 versus 0.19), and this difference

17The four firms using leases in the service industry and their associated lease ratios are Caesar's World (6.9%), Marriott (0.6%), Comdisco (10.7%), and Continental Information Systems (18.9%). Caesar's World's gaming business employs extensive non-firm-specific gaming assets that have good leasing potential. Both Comdisco and Continental Information Systems are computer information firms that make extensive use of readily-leased computer equipment. The Altman Z-score for these four firms averaged 2.64 versus 7.68 for the 35 non-leasing service firms.

18SJLM (1987) found a similar result in their analysis of the determinants of lease yields.




is significant at the 0.01 level. The multivariate analysis presented below yields a result that is more consistent with the Marston and Harris (1988) finding and with the

hypotheses tested in this paper, specifically that leasing and debt financing are substitutes if one controls for bankruptcy risk, growth, and the firm-specific nature of a company's assets.

The Altman Z-score is significantly lower (5.67) for the

leasing firms than for the non-leasing firms (10.86), which

provides additional support for the bankruptcy-cost hypothesis. Overall, the univariate tests of the

bankruptcy-potential hypothesis support a

bankruptcy-potential rationale for leasing. Growth opportunities are measured by the

ASSETGROW variable. It is apparent, from Table 4, that

leasing firms have experienced significantly greater growth than non-leasing firms.19 The higher asset growth rates of

leasing firms is consistent with the view that leasing can be an effective solution for the asset substitution problem that lenders encounter.

Finally, like Ang and Peterson (1984) and Finucane

(1988), we find no evidence that the average tax rate differs between leasing and non-leasing firms. Furthermore, the correlation between TAXRATE and Z-SCORE is only 0.091, with a p-value of 0.09, indicating the weak association between tax rates and bankruptcy potential. In addition, there are several firms in the leasing sample with high tax rates and low Z-scores and vice versa. The lack of a significant difference between the tax rates of leasing and non-leasing firms was expected because our sample is restricted to firms that report capital leases, which generally do not qualify as true leases under the Internal Revenue Code.

C. Multivariate Analysis A multivariate analysis of the data was undertaken to

control for potential interactions among the variables. A

logistic regression model was fitted with a qualitative classification variable, GROUP (GROUP = I for leasing firms and 0 for non-leasing firms), serving as the dependent variable and with the variables described earlier in the paper serving as the independent variables. The logistic regression method is appropriate because of the dichotomous nature of the dependent variable.20 Further, the main objectives of the multivariate analysis are (1) to confirm the univariate results

and (2) to determine the significant differences between leasing and non-leasing firms. The logit model that is estimated can be written as

In[ Pr(Groupi = 1IXi) / Pr(Groupi = 01Xi) = a + Xij, (1)

where Xi is the vector of independent variables used in the

analysis and P the vector of coefficients. The expression on the right-hand side indicates the ratio of the probabilities of a firm being a leasing firm and a non-leasing firm. Ordinary least squares (OLS) estimates of a regression model with the lease ratio (LRA) as the dependent variable also are provided. However, the OLS measures may be biased because of the truncated nature of the dependent variable (all non- leasing firms have a value of zero for LRA).

The maximum likelihood estimates for the parameters of the model are given in Table 5. A significant positive coefficient for a variable indicates that the probability of a firm being a leasing firm is an increasing function of the value of the variable. A significant negative coefficient indicates that lower values for a variable increase the probability of a firm being a leasing firm.

The coefficient of ASSETGROW is significant and positive, which supports the hypothesis that high-growth firms tend to be leasing firms. The coefficients for the RETEARN and EBITCOVR variables are significant and negative, supporting the hypothesis that leasing firms are likely to have higher financial distress potential. EBIT/TA has a significant relationship opposite to that hypothesized, a result similar to that found in the univariate analysis and also found by SJLM. MBRATIO is insignificant. EBITVAR is significant at the 0.12 level in the logistic regression and at the <0.01 level in the OLS regression, indicating some support for a positive relationship between the operating risk dimension of potential financial distress and the use of leasing. LDA has a significant negative coefficient, contrary to the univariate results but consistent with the traditionally hypothesized substitute relationship between leasing and borrowing.

We find evidence of significantly greater use of lease financing in mining, transportation, and retailing than in

manufacturing.21 There is no significant difference between leasing in the services industry and leasing in manufacturing, and there is only weak evidence of a greater use of lease financing in the wholesale industry. Overall, these results are consistent with the hypothesis that firms in those industries that make heavy use of non-firm-specific assets (e.g., the mining, transportation, retail, and wholesale industries) are

'Similar analyses were performed using growth in EBIT and growth in sales. In each case. leasing firms had significantly greater growth than non-leasing firms over the five years prior to the beginning (1984) of the sample period. w

Amemiya (1968) and Ederington (1985) discuss the merits and disadvan- tages of alternative methodologies for dealing with qualitative response variables.

21Firms in the construction industry were omitted from the multivariate model sample because none of the firms in that industry reported the use of lease financing.




Table 5. Multivariate Tests of Bankruptcy, Growth and Industry Effects Hypotheses

Logistic Regression Ordinary Least Squares Dependent Variable = LRAb

Variablea Beta p-value Beta p-value

Intercept -3.22 <0.01 0.0017 0.89 ASSETGROW 1.64 0.04 0.014 0.12 RETEARN -3.53 <0.01 -0.036 <0.01 EBITCOVR -0.042 0.06 -0.00004 0.29 EBIT/TA 10.21 <0.01 0.057 <0.01 LDA -3.08 0.02 -0.029 0.01 EBITVAR 0.0023 0.12 0.00004 <0.01 MBRATIO -0.023 0.65 -0.0003 0.54 MINING 1.69 <0.01 0.0094 0.04 TRANSPORTATION 1.67 <0.01 0.044 <0.01 RETAIL 2.31 <0.01 0.024 <0.01 WHOLESALE 0.81 0.15 0.0064 0.28 SERVICES -0.51 0.39 0.0029 <0.01

Model adjusted R2 16.9% 20.8%

Chi-square statistic 107.3 F-value 12.1

p-value <0.01 <0.01

aASSETGROW = geometric mean 5-year growth rate in fixed assets; RETEARN = retained earnings/total assets; EBITCOVR = EBIT/total interest charges; EBIT/TA = EBIT/total assets; LDA = long-term debt/total assets; EBITVAR = coefficient of variation of EBIT over the previous 10 years; MBRATIO = market-to-book ratio, year-end 1984; and MINING, TRANSPORTATION, RETAIL, WHOLESALE, SERVICES = a dummy variable equal to 1 if the firm is in that industry; otherwise it is set equal to 0 (MANUFACTURING is the omitted class). bLRA = capitalized leases to total assets.

more likely to lease than firms in manufacturing, which are likely to employ a higher proportion of firm-specific assets.22

D. Effect of Non-reported Capital Leases

Classification of the sample into leasing and non-leasing firms was based on whether capitalized leases appeared on the balance sheet. It is possible that some firms with large lease obligations that are really noncancellable financial leases may not report them as capital leases on the balance sheet, because of imperfections in FASB Statement #13. Firms that have significant financial lease obligations but do

not report them on their balance sheets would be classified as non-leasing firms, thereby biasing the results of our study. Any bias that may exist, however, would be a bias against rejecting the null hypotheses. In order to estimate the potential presence of non-capitalized financial leases among the financial obligations of" non-leasing" firms, we selected a random sample of 25 non-leasing firms and examined the notes to their financial statements. Only three of the 25 firms had financial leases, identified as being noncancellable, that were not reported on the balance sheet as capital leases. The capitalized value of these leases was low, ranging from 0.4% to 1.2% of total assets. Twenty-two of the twenty-five firms reported some amount of operating leases. The magnitude of the lease rental payment is small relative to the firms' total operating expenses, ranging from 0.9% to 6%, with a mean of 2.9%. Low-value leases often are entered into for non-financial reasons. Hence the analysis in this paper does not apply to firms that report only low-value leases. The

--We excluded the tax rate variable from the reported multivariate analysis, based on the results of our univariate analysis and our restricting the leasing sample to firms reporting capital leases. The tax rate variable is statistically insignificant when it is included in the multivariate model. It does not change the qualitative impact of any other variables. but it does result in a greatly reduced sample size, due to missing values.




group classified as leasing firms also includes some firms with small-value leases. To see the effects caused by these firms, the empirical analysis was repeated using a value of 1% for the ratio of leases to total assets for purposes of

classifying firms as leasing and non-leasing firms. Using this revised classification procedure, the univariate results are

marginally stronger in support of the hypotheses developed in this paper.

VI. Conclusions We have reconsidered the financial lease versus buy

decision giving explicit recognition to the role played by bankruptcy costs. Our analysis suggests that leasing has lower associated bankruptcy costs relative to secured debt, and thus becomes (at some point) a preferred financing option for firms with a higher potential for financial distress or bankruptcy. Accordingly, firms that use lease financing are expected to exhibit different financial characteristics than firms that do not use lease financing. The empirical analysis reveals that leasing firms and non-leasing firms are significantly different in their financial characteristics. The leasing firms have significantly lower retained earnings

relative to total assets, lower coverage ratios, higher operating risk, higher debt ratios, higher growth rates, and lower values of the Altman Z-score. We also find that firms in the manufacturing sector make significantly less use of lease financing than firms in retailing, transportation, mining, and, to a lesser extent, wholesaling. This result is attributed to the greater asset specificity associated with the manufacturing sector.

These findings provide additional insight regarding the rationale for financial leasing. By restricting our analysis to capital leases, tax-based arguments to explain leasing for the firms in our data set can be excluded. Our results help to explain the anomalous finding that leasing firms tend to have higher debt ratios than non-leasing firms, a contradiction of the normal presumption that leasing represents a financing alternative to borrowing on a conventional basis.-Overall, our results suggest that as bankruptcy potential increases, ceteris paribus, lease financing becomes an increasingly attractive financing option in the pecking order of alternatives, offsetting the higher transactions costs that normally accompany lease agreements versus secured debt agreements. I

References Altman, E.I., 1968, "Financial Ratios, Discriminate Analysis, and the

Prediction of Corporate Bankruptcy," Journal of Finance (September), 589-611.

Amemiya, T., 1968, "Quantitative Response Models: A Survey," Journal of Economic Literature (December), 1483-1536.

Ang, J. and P.P. Peterson, 1984, "The Leasing Puzzle," Journal of Finance (September), 1055-1065.

Barrett, P. and A. Sullivan, 1988, "New Activists: Usually Last in Line, Holders Become Vocal in Bankruptcy Actions," Wall Street Journal (January 21), 1.

Barro, R.J., 1976, "The Loan Market, Collateral and Rates of Interest," Journal of Money, Credit and Banking (November), 439-456.

Beaver, W.H., 1966, "Financial Ratios as Predictors of Failure," Empirical Research in Accounting: Selected Studies, Journal oI Accounting Research (Supplement), 71-111.

Beaver, W.H., 1968, "Alternative Accounting Measures as Predictors of Failure," Accounting Review (January). 113- 1 22.

Benjamin, D.K.. 1978. "The Use of Collateral to Enforce Debt Contracts," Econonic Enquiry (July), 333-359.

Bower. R.S.. 1973. "Issues in Lease Financing," Financial Managenment (Winter), 25-34.

Bowman, R.G.. 1980. "The Debt Equivalence of Leases: An Empirical Investigation," Accounting Review (April). 237-253.

Brealey, R. and C. Young, 1980, "Debt, Taxes and Leasing: A Note," Journal of Finance (December), 1245-1250.

Brick, I.E., W. Fung, and M. Subrahmanyam, 1987, "Leasing and Financial Intermediation: Comparative Tax Advantages," Financial Management (Spring), 55-59.

Crawford, P.J., C.P. Harper, and J.J. McConnell, 1981, "Further Evidence on Terms of Financial Leases," Financial Management (Autumn), 7-14.

de la Torre, C. and J.D. Benjamin, 1991, "Residual Asset Values and Leasing," University of Nebraska Working Paper.

Eberhart, A.C., W.T. Moore, and R.L. Roenfeldt, 1990, "Security Pricing and Deviations from the Absolute Priority Rule in Bankruptcy Proceedings," Journal of Finance (December), 1457-1469.

Ederington, L.H., 1985, "Classification Models and Bond Ratings," The Financial Review (November), 237-260.

Finucane, T.J., 1988, " Some Empirical Evidence on the Use of Financial Leases," Journal f Financial Research (Fall), 321-333.

Gudikunst, A.C. and G.S. Roberts, 1978. "Equipment Financial Leasing Practices and Costs: Comment," Financial Management (Summer). 79-83.

Jackson. T.H. and A.T. Kronman, 1979, " Secured Financing and Priorities among Creditors," Yale Lawl Journd (May), 1143-1182.

Klein. B.. R.G. Crawford, and A.A. Alchian. 1978, " Vertical Integration, Appropriable Rents and the Competitive Contracting Process." Journal of Law and Economics (October), 297-326.




Krahan, J.P. and G. Meran, 1987, "Why Leasing? An Introduction to Comparative Contractual Analysis," in G. Bamberg and K. Spremann. eds., Agency Theory, Information, and Incentives, Berlin, Springer Verlag, 255-280.

Lease, R.C., J.J. McConnell, and J.S. Schallheim, 1990, "Realized Returns and the Default Prepayment Experience of Financial Leasing Contracts," Financial Management (Summer), 11-20.

Leeth, J.D. and J.A. Scott, 1989, "The Incidence of Secured Debt: Evidence from the Small Business Community," Journal of Financial and Quantitative Analysis (September), 379-394.

Lewellen, W.G., M.S. Long, and J.J. McConnell, 1976, " Asset Leasing and Competitive Capital Markets," Journal of Finance (June), 787-798.

Lewis, C.M. and J.S. Schallheim, 1992, "Are Debt and Leases Substitutes?," Journal of Financial and Quantitative Analysis (December), 497-511.

Mapother, W.R., 1984, Creditors and the New Bankruptcy Code: 1984 Supplement, Louisville, KY, Creditors' Law Center.

Marston, F. and R.S. Harris, 1988, "Substitutability of Leases and Debt in Corporate Capital Structures," Journal of Accounting, Auditing & Finance (Spring), 147-169.

Miller, M.H. and C.W. Upton, 1976, "Leasing, Buying and Cost of Capital Services," Journal of Finance (June), 761-786.

Moyer, R.C., M.W. Marr, and R.E. Chatfield, 1987, "Non-convertible Preferred Stock Financing and Financial Distress: A Note," Journal of Economics and Business (February), 81-89.

Myers, S.C., 1977, "Determinants of Corporate Borrowing," Journal of Financial Economics (November), 147-175.

Myers, S.C., D.A. Dill, and A.J. Bautista, 1976, "Valuation of Financial Lease Contracts," Journal of Finance (June), 799-820.

Ohlson, J., 1980, "Financial Ratios and the Probabilistic Prediction of Bankruptcy," Journal of Accounting Research (Spring), 109-131.

Roenfeldt, R.L. and J.B. Henry, 1979, " Lease-cost Measurement of Hospital Equipment Under Cost-Based Reimbursement," Financial Management (Summer), 24-35.

Schallheim, J.S., R.E. Johnson, R.C. Lease, and J. J. McConnell, 1987, " The Determinants of Yields on Financial Leasing Contracts," Journal of Financial Economics (September), 45-67.

Scott, J.H., 1977, "Bankruptcy, Secured Debt and Optimal Capital Structure," Journal of Finance (March), 1-19.

Slovin, D., M. Sushka, and J. Polonchek, 1990, "Restructuring Transactions by Bank Holding Companies: The Valuation Effects of Sale-and-Leasebacks and Divestitures," Arizona State University Working Paper.

Smith, C.W. and L.M. Wakeman, 1985, "Determinants of Corporate Leasing Policy," Journal of Finance (July), 895-908.

Smith, C.W. and J.B. Warner, 1979, "Bankruptcy, Secured Debt, and Optimal Capital Structure: Comment," Journal of Finance (March), 247-251.

Sorensen, E.W. and R.E. Johnson, 1977, "Equipment Financial Leasing Practices and Costs: An Empirical Study," Financial Management (Spring), 33-40.

Stulz, R.M. and H. Johnson, 1985, "An Analysis of Secured Debt,"Journal of Financial Economics (December), 501-521.

Vora, P.P. and J.R. Ezzell, 1991, " Leasing vs. Purchasing: Direct Evidence on a Corporation's Motivations for Leasing and Consequences of Leasing," Pennsylvania State University Working Paper (March).

Warner, J.B., 1977, "Bankruptcy, Absolute Priority, and the Pricing of Risky Debt Claims," Journal of Financial Economics (May), 239-276.



Documents

Bankruptcy Costs and the Financial Leasing Decision