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Leverage deviation from the target debt ratio and leasing

Author

Listed:
  • Hasibul Chowdhury
  • Shofiqur Rahman
  • Harikumar Sankaran

Abstract

We find a negative association between the leverage deviation and leasing intensity, implying that firms actively use leasing as a source of financing when faced with a leverage deviation. This negative relation is more pronounced for firms that are underleveraged, are financially constrained, and have a high likelihood of bankruptcy, and weaker for firms with a greater need to preserve debt capacity. We attribute these incentives to distinct features of the lease contract that separate it from secured debt contracts. Overall, our results are consistent with the substitution effects of lease and debt.

Suggested Citation

  • Hasibul Chowdhury & Shofiqur Rahman & Harikumar Sankaran, 2021. "Leverage deviation from the target debt ratio and leasing," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 3481-3515, June.
    • Handle: RePEc:bla:acctfi:v:61:y:2021:i:2:p:3481-3515
    DOI: 10.1111/acfi.12710
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    Cited by:

    1. Obaid Ur Rehman & Xiaoxing Liu & Kai Wu & Junfeng Li, 2023. "Customer concentration, leverage adjustments, and firm value," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 2035-2079, June.
    2. Rahman, Shofiqur & Chowdhury, Hasibul, 2023. "Tournament-based incentives and the lease-versus-buy decision," Journal of Banking & Finance, Elsevier, vol. 148(C).

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