An agency theory approach to financial leasing

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Title: An agency theory approach to financial leasing
Author: Sivaramakrishnan, Vaidhyanathan
Abstract: Theoretical works on financial leasing generally assume perfect market conditions and show that the only rationale for capital leases , which are considered substitutes for borrowing , is the tax differential between the lessee and the lessor . Empirical studies , however , show that lessors invariably earn returns higher than lenders . Also , studies of lessees have shown that lease ratios and debt ratios are positively correlated , indicating that debt _and lease financing may be complements rather than substitutes . There have been no explanations for these puzzling results . This dissertation departs from the analytical approach to financial leasing found in extant literature by explicitly recognizing the existence of agency costs and bankruptcy costs . It is shown that leasing has lower agency and bankruptcy costs . Therefore , firms with high agency costs of debt and high bankruptcy potential may find it attractive to lease even in the absence of a tax incentive . The dissertation develops empirically testable hypotheses , which are tested as part of the dissertation . The empirical analysis uses a large sample of firms from the Disclosure database . The firms are classified into leasing and non -leasing firms , using the criterion of the presence of capitalized leases in the balance sheet . The basic hypotheses tested are as follows : 1 . The leasing firms and non -leasing firms differ in many financial characteristics . 1 . The leasing firms have higher bankruptcy potential . 2 . The leasing firms have higher agency costs of debt . The study uses univariate analysis for testing differences in mean values for a number of accounting and financial ratios which are considered proxies for bankruptcy potential and agency costs of debt . Multivariate methods like regression and discriminant analysis are also used to provide additional and confirmatory evidence . The evidence reveals general support for the theory developed in the dissertation . There are significant differences in several financial ratios for the leasing and non -leasing firms . The leasing firms use higher leverage and show higher growth rates for sales , earnings before interest and taxes , and fixed assets . The leasing firms also show higher business risk as measured by the coefficient of variation of earnings before interest and taxes .
URI: http : / /hdl .handle .net /2346 /17134
Date: 1988-08


An agency theory approach to financial leasing. Doctoral dissertation, Texas Tech University. Available electronically from http : / /hdl .handle .net /2346 /17134 .

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