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Leases and Debt: Complements or Substitutes? Evidence from Belgian SMEs

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  • Marc Deloof
  • Istvan Lagaert
  • Ilse Verschueren

Abstract

This study investigates the lease–debt relationship for Belgian small and medium‐sized enterprises (SMEs). Traditional finance theory suggests that leases and corporate debt are substitutes: both leases and debt are fixed, contractual obligations that reduce the firm's debt capacity. More use of leases should therefore be associated with less non‐lease debt financing. However, some empirical studies find that for large firms, leases and debt are complements. A theoretical explanation for this so‐called “leasing puzzle” is based on the tax advantage of leasing over debt. However, in Belgium, tax differences between lessor and lessee do not affect the choice between leases and debt, because the lessee is considered to be the fiscal owner of the assets. He may write off these assets for tax purposes, and the interest part of the lease payments are deductible from his taxable income. Leases and debt can therefore be expected to be substitutes. This hypothesis is tested for a sample of 5,595 firm‐year observations for 1,119 Belgian nonfinancial SMEs in the 1995–1999 period. The results indeed provide strong support for the substitution hypothesis: more debt is associated with less leases.

Suggested Citation

  • Marc Deloof & Istvan Lagaert & Ilse Verschueren, 2007. "Leases and Debt: Complements or Substitutes? Evidence from Belgian SMEs," Journal of Small Business Management, Taylor & Francis Journals, vol. 45(4), pages 491-500, October.
    • Handle: RePEc:taf:ujbmxx:v:45:y:2007:i:4:p:491-500
    DOI: 10.1111/j.1540-627X.2007.00224.x
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    Cited by:

    1. Amare Abawa Esubalew & A. Raghurama, 2021. "The moderating effect of size on the relationship between commercial banks financing and the performance of micro, small, and medium enterprises (MSMEs)," Journal of Global Entrepreneurship Research, Springer;UNESCO Chair in Entrepreneurship, vol. 11(1), pages 1-14, December.

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