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The fixed payment financing decision

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  • Sungjune Kang
  • Michael S Long

Abstract

We first investigate the factors influencing the industrial firm's decision to use fixed payment financing or regular debt plus leasing. We find that the level of fixed financing is positively related to the portion of fixed assets in the firm and negatively related to profitability, risk, and the levels of both advertising and R&D expenditures. We then focus on the more interesting issue of why firms lease instead of use regular borrowing. Using additional variables along with the residuals from the initial regression, the firm's tax position, agency costs, and bankruptcy costs, and asymmetric information are significant factors in predicting leasing levels as others have found. We also find that firms that use more fixed form financing than predicted also use lower portions of leasing. This is consistent with leasing and regular debt being substitutes. In quartile splits on total leverage, firms with high levels of regular debt also have higher levels of leasing, which is consistent with Ang and Peterson's [J. Finance 39 (1984) 1055.] earlier empirical study on lease financing levels. Our results are robust regardless of how leasing is measured. We consider operating leases, capital leases, and all leases. For regular debt, we considered both all debt and funded debt. These values are scaled by the market value of total assets.

Suggested Citation

  • Sungjune Kang & Michael S Long, 2001. "The fixed payment financing decision," Review of Financial Economics, John Wiley & Sons, vol. 10(1), pages 41-55, March.
    • Handle: RePEc:wly:revfec:v:10:y:2001:i:1:p:41-55
    DOI: 10.1016/S1058-3300(01)00023-4
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    References listed on IDEAS

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    Cited by:

    1. Jacques Sarremejeanne, 2011. "Les déterminants financiers des cessions-bail," Post-Print hal-00650571, HAL.
    2. Emhjellen, Magne & Løvås, Kjell & Osmundsen, Petter, 2009. "LNG Project Valuation with Financial Leasing Contracts," UiS Working Papers in Economics and Finance 2009/15, University of Stavanger.
    3. Thierry Kamga Tadie & Claude Essomba Ambassa & Louis Aimé Fono & Jules Sadefo-Kamdem, 2021. "Criteria for choosing the method of leasing finances in Small and Medium Enterprises (SMEs) in Cameroon [Critères de choix du mode de financement par crédit-bail dans les Petites et Moyennes Entrep," Post-Print hal-03131640, HAL.

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