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Leverage deviation from the target debt ratio and leasing
Author(s) -
Chowdhury Hasibul,
Rahman Shofiqur,
Sankaran Harikumar
Publication year - 2021
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12710
Subject(s) - leverage (statistics) , bankruptcy , debt , lease , business , incentive , monetary economics , standard deviation , debt ratio , finance , economics , microeconomics , machine learning , computer science , statistics , mathematics
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.