the determinants of the leasing decision of small and large
TRANSCRIPT
The Determinants of the Leasing Decision of Small andLarge Companies
M. Ameziane Lasfer and Mario Levis*
City University Business School, Barbican Centre, London EC2Y 8HB, UK.email: [email protected], and [email protected].
Abstract
We analyse the leasing decision of more than 3000 UK quoted and unquotedcompanies over the sample period 1982-1996. We show that, for the sample as awhole, companies that use leasing are more likely to have tax losses, high fixed capitalinvestment, high debt-to-equity ratio and to be larger than companies that do not useleasing. We show, however, that the determinants of leasing are not homogeneousacross firms of different size. For large companies, leasing, profitability, leverage andtaxation are positively correlated. In contrast, for small companies, the leasing decisionis not driven by taxation or by profitability, but by growth opportunities. We showthat small firms with high Tobin’s q and those that are less profitable are more likely touse leasing.
Keywords: leasing, debt finance, taxation, growth opportunities, small firms.
JEL classification: G32
* We would like to thank Martin Hall and Andy Thompson from the Finance Lease Association forthe useful comments and the financial support for this study. Our thanks also to seminar participantsat Hull University, City University Business School and Economics Department, and participants atthe 6th European Financial Management Association meetings in Istanbul for helpful comments.Responsibility for any errors and omissions rests, obviously, with the authors.
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1. Introduction
Leases take several different forms, the most important of which are sale and leaseback,operating leases and straight financial or capital leases. While these types of leasing differ intheir legal, tax and accounting treatments, they are all viewed, in the theory of finance, aspart of the financing decisions of the firm. The economic benefits of leasing can be derivedfrom the firm's choice of leasing relative to borrowing and acquiring the asset.
The essence of leasing is reflected in the proposition that leasing provides customisedfinancing with potentially unique tax features. Unlike borrowing, the ownership of theasset remains with the lessor and the lessor can deduct tax shields generated by theleased equipment. If the lessee is unable to utilise the depreciation and interest expensedeductions from corporation tax because of the high operating losses and/or other taxallowances, it can partially utilise the tax incentives associated with asset purchase byleasing the asset. Other rationales for leasing include lessee’s debt capacity, asset type andsalvage value, conservation of working capital, ease of obtaining credit by firms with poorcredit ratings, flexibility and convenience and resolution of agency conflicts. These benefitsof leasing could make previously rejected projects based on the purchase of the assetacceptable.
Empirical evidence provided to-date is, however, mixed. Finucane (1988) and Mehranand Taggart (1995) show that tax-related factors are not significantly associated withthe level of leasing by a firm. In contrast, Barclay and Smith (1995), Sharpe andNguyen (1995) and Graham, Lemmon and Schallheim (1997) find that companies withhigh proportion of tax-losses rely more on lease finance suggesting that leases are usedmore heavily by firms for which the tax-benefits of ownership appear low. Similarly,inconsistent with the theory, a number of studies show that debt financing is acomplement not a substitute to leasing (e.g., Bowman (1980); Ang and Peterson(1984); Finucane (1988)). However, after controlling for lessee’s debt capacity, leasingis found to be a complement for debt financing (e.g., Marston and Harris (1988);Krishnan and Moyer (1994); Sharpe and Nguyen (1995)). Furthermore, the extent towhich leasing is determined by the resolution of potential agency conflicts is difficult totest because of the lack of data on firm’s asset types. However, consistent with theresolution of agency conflicts, leasing activity is found to be more prevalent in certainindustries (e.g., Finucane (1988) and Krishnan and Moyer (1994)), in firms with assetsthat make good collateral (e.g., Finucane (1988)), in firms with high growthopportunities and those that are not regulated (e.g., Barclay and Smith (1995)), infirms with high proportion of insider ownership (e.g., Mehran and Taggart (1996)) andin smaller firms (e.g., Barclay and Smith (1995) and Sharpe and Nguyen (1995)).
The issue of size is, however, controversial. Barclay and Smith (1995) and Sharpe andNguyen (1995) used size as another proxy variable for asset type and the resolution ofagency conflicts. They argue that large diversified firms are less likely to rely on leasingthan smaller firms because they are less concerned with internal redeploymentpossibilities. However, Jensen (1986) argues that agency problems are more likely toprevail in large mature firms. Thus, if leasing mitigates agency costs, we would expectlarge firms to lease more than smaller firms. The purpose of this paper is to extent thisliterature by analysing the leasing decision of small versus large companies and ofquoted versus privately held companies. Although, as in previous studies, we consider
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firm size as a measure of the extent to which firms have the ability to redeploy assetsinternally, we also believe that the determinants of the leasing decision are likely to besize dependent because of the differences in the financing opportunities available tosmall and large companies and in their potential agency costs. We analyse financialstatements of more than 3,000 companies registered in the UK over the sample period1/04/1982 to 31/03/1996. We focus on all unquoted and publicly quoted companiesfor which the financial and accounting data is available in machine readable form. Ouranalysis in centred on finance lease and hire purchase and exclude operating leasewhich is a short-term, cancellable lease.
For the sample as a whole, we find strong evidence that companies that use leasinghave higher tax losses, higher debt-to-equity ratio, are larger and invest significantlymore than non-lessee companies. Thus, our results suggest that leasing contributes tothe financing of fixed capital formation and that leasing may be the cheapest source offinance. However, when we split our sample into size deciles using either total assets,sales and, for quoted companies, market value of equity, we find that the determinantsof leasing are size dependent. We show that, for small companies, taxation does nothave a significant impact on the probability of leasing. Unlike large companies, smallquoted and all unquoted companies do not carry a larger proportion of tax carryforward in their accounts and do not report higher relative tax recoverable than non-lessee companies. In contrast, the leasing decision of small firms is substantiallyaffected by their growth opportunities, while, for large companies, Tobin’s q, used as aproxy for growth potentials, is not significant.
We also find strong evidence that, for quoted and unquoted small and medium-sizedcompanies, leasing is a substitute for debt financing. In contrast, for large firms, leasingis a complement to debt financing. Furthermore, we show that, on average, lesseecompanies are significantly more profitable than non-lessee companies. This significantdifference is particularly apparent for large companies. The results suggest that leasingcontributes to these firms’ profitability and imply that firms with sophisticated financialmanagement are likely to lease. In contrast, small lessee companies are less profitablethan non-lessee companies. Given their poor performance, partly due to their highgrowth, small firms may find it difficult to use alternative sources of finance. In short,our results suggest that leasing contributes to the survival and to the financing ofgrowth opportunities of small companies, while taxation is the main determinant oflarge companies’ leasing decision.
The rest of the paper is organised as follows. Section 2 presents a review of theliterature and the hypotheses tested. In Section 3, we discuss the data and themethodology employed. In Section 4, we present our empirical results. Conclusionsare in Section 5.
2. Review of the Literature
Where the purchasing firm (lessee) and the lessor have the same tax status, borrow andlend at the same rate of interest, and have similar expectations regarding the salvage valueof the asset, there is no advantage to leasing over purchasing. In practice, these perfectcapital market conditions are not satisfied, resulting in a number of rationales for
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leasing. Previous studies have identified the following three main reasons for theexistence of leasing:
• tax differential : If the lessee pays little or no corporation tax, he/she will passon the capital allowances to the lessor. Part of these allowances will bereturned to the lessee through lower rental payments.
• debt substitutability : Leasing can be a substitute for debt finance because bothof them reduce debt capacity. However, given the fact that lessors have firstclaim on the asset leased, leasing is likely to be advantageous for financiallydistressed companies.
• agency costs : Modern corporations characterised by a divorce betweenownership and control are likely to suffer from the free cash flow problemwhere managers undertake negative NPV projects. Given that leasing is not aninvestment decision and lessors have first claim over the asset, it can reduce theagency conflict.
In this section we review the previous literature relating to these effects.
2.1. Taxes and leasing
Traditionally, the theory of financial leasing has focused on the differential tax positionof the lessee and the lessor as the primary rationale for leasing.1 The fundamentalargument is that, if a firm is not in a full tax-paying position, purchasing anddepreciating an asset may be costly as no or lower capital or depreciation taxallowances are claimed. However, by leasing the asset, the lessor would claim the taxallowances which could be transferred indirectly to the lessee through lower leasepayments. Thus, while the after-tax NPV of the asset if purchased could be negative,the lease possibility will make the investment a positive NPV project.
DeAngelo and Masulis (1980) show that when firms’ debt capacity to fully use taxdeductions is limited, their use of debt financing is reduced. Empirically, MacKie-Mason (1990) study incremental financing decisions using discrete choice analysis tofind that tax shields affect significantly the choice between issuing debt or equity.Similarly, Graham (1996) show that the incremental use of debt is affected by thesimulated firm-specific marginal tax rates. Using UK data, Lasfer (1995) shows thatfirms that pay lower taxes, after accounting for stock relief, capital allowances, tradinglosses and ACT recoverable, are likely to have lower debt financing in their capitalstructure. In particular, firms that are tax exhausted use less debt than tax-payingfirms.
Under this framework, Lewis and Schallheim (1992) model the leasing and borrowingdecision. They focus on leasing as a means for selling excess, non-debt tax deductions.In their model, non-debt tax shields are sold via leasing, therefore reducing thepotential redundancy with interest deductions and making the marginal value of debt 1 See, for example, Bower, 1973; Brealy and Young, 1980; Lewellen, Long and McConnell, 1976;Miller and Upton, 1976; Myers, Dill and Bautista, 1976; and Brick, Fung and Subrahmanyam, 1987.
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positive. The lessee responds by using additional debt. In this way, Lewis andSchallheim establish the theoretical possibility of a positive relationship between debtand lease financing, even within the same firm. (The issue of the relationship betweendebt and leasing is discussed in the next section). Furthermore, in this model, thebenefits from leasing are realised even if the marginal tax rate is the same for the lesseeand the lessor.
Empirical evidence provided to date on the influence of taxes on leasing is mixed. Forexample, Finucane (1988) show that tax-related factors are not significantly associatedwith the level of leasing by a firm. These results may, however, be driven by the factthat Finucane looked at ‘capital’ leases, as defined by FASB Statement No 13, whichare not likely to be affected by tax factors because they are treated by the InlandRevenue Service as instalment sales contracts for tax purposes. Mehran and Taggart(1995) use the ratio of reported tax less change in deferred tax over earnings beforeinterest and tax to estimate the impact of taxes on leasing for a sample of 134 large UScompanies over the period 1979-80. They find that the coefficient of this variable isnot significant. These results are likely to be driven by the lower number of firmsanalysed and the shorter sample period. Other studies find a strong evidence of taxeffects. Barclay and Smith (1995) find that companies with high proportion of tax-losscarry forward rely more on lease finance. Sharpe and Nguyen (1995) construct twoalternative proxies for a firm’s tax status. The first is the ratio of tax expense over pre-tax income. The second is a dummy variable equal to one if the firm reported in itsfinancial statements tax-loss carry forward. These firms are considered to be taxexhausted and thus unable to take full advantage of the tax benefits of ownership.These two measures are found to be significant, suggesting that capitalised leases areused more heavily by firms for which the tax-benefits of ownership appear low.Graham et al (1997) compute the marginal effective corporate tax rates and consideronly operating leases which are likely to be true leases for tax purposes. They showthat a change in the marginal tax rate from 0 to 46 percent will, on average, result in19 percent decrease in the firm’s ratio of operating leases to firm value and in a 7percent decrease in the ratio of capital leases to firm value.
2.2. Leasing and debt capacity
At the same time as leasing is related to taxes, Finance theory has considered leasing asa substitute for corporate borrowing. Myers, Dill and Bautista (1976) and Franks andHodges (1978) view leasing and long-term debt as fixed, contractual obligations. Bothleasing and debt reduce firm’s debt capacity, and, as a consequence, greater use oflease financing should be associated with less reliance on debt.
However, empirical evidence contradicts this approach. A number of studies showthat greater use of leasing tends to be associated with more debt financing. Forexample, using a sample of 92 US firms in 1973, Bowman (1980) find that firms withhigh levels of outstanding debt engage also in leasing activity. Ang and Peterson(1984) use a Tobit analysis on cross-sections of about 600 firms over the 1976-81period to estimate the relationship between the likelihood and the extent of leasingactivity and a firm’s debt ratio and other explanatory variables. Their results show apositive and statistically significant relationship between leasing activity and debtratios. Finucane (1988) also conducted a Tobit analysis over the period 1981-85 and
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shows that leasing and debt financing are positively correlated. Moreover, Finucaneshows that firms in certain industries, such as air transport and retailing, rely more onleasing. His cross-sectional analysis revealed that the lease ratio (capital leases to totalassets) is related to the level of mortgage debt and the bond rating where firms withlower bond ratings are found to lease more frequently.
The above studies, however, fail to control for the underlying factors that determinedebt capacity. Smith and Wakeman (1985) argue that the results of Ang and Peterson(1984) probably reflect the difficulties of controlling for debt capacity. They arguethat firms with higher debt capacity may also have other characteristics that makeleasing relatively attractive. In particular, firms with certain asset characteristics arelikely to have greater debt capacity, and, as such, they can afford to use more lease anddebt financing than other firms. A number of more recent studies have analysedleasing decision after controlling for such considerations. Marston and Harris (1988)analyse the contemporaneous changes in leasing and changes in debt financing across asample of firms. They find these two variables to be inversely related, confirming thatlease and debt are substitutes. However, they find that firms that employ leasefinancing typically use higher levels of debt compared to firms that do not use leasing.Krishnan and Moyer (1994) hypothesise that leasing reduces bankruptcy costs incomparison to financing with ordinary debt while having all the advantages of secureddebt. Under these considerations leases should be more widely used by riskier, lessestablished firms. They find that lessee firms have lower retained earnings, highgrowth rates, lower coverage ratios, higher debt in their capital structure higheroperating risk and lower z-score than non-lessee firms. Their evidence suggest that asbankruptcy potential increases, lease financing becomes an increasingly attractivefinancing option. Nonetheless, their analysis ignores operating leases and examines theuse of capital leases which are not driven by taxes in the US.
Sharpe and Nguyen (1995) analyse the intensity to use both operating and capitalleasing. They hypothesise that a firm’s propensity to lease is a function of the type ofcapital required and the extent of leasing-related transactions costs associated withsuch assets. They controlled for these unobservable factors by analysing a firm’spropensity to lease relative to other firms in its own industry. They find that leasingpropensity - operating and capital leases over book value of fixed assets - issubstantially higher for lower-rated, non-dividend-paying and poor-cash firms. Theirresults suggest that leasing is used extensively by firms that are likely to face relativelyhigh premiums for external funds.
A number of other studies provide survey evidence in favour of lease-debt substitution.For example, Mukherjee (1991) asked 103 chief financial officers of Fortune 500 firmswhether they viewed debt and leasing as substitutes, complements or independentfinancing instruments. While 22 of the respondents felt that the relationship iscomplementary and 31 saw the two as independent, 47 reported that lease and debtfinancing are substitutes.
2.3. Leasing and agency costs
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Another set of arguments for the determinants of leasing focus on agency andcontracting costs. Smith and Wakeman (1985) provide a unified analysis of the variousincentives affecting the lease-versus-purchase decision and suggest that taxes are importantin identifying potential lessees and lessors but they are less important in identifying thespecific assets leased. They suggest that firms are unlikely to lease assets that are highlyspecific to the organisation because the resulting bilateral monopoly problem would createagency conflicts between the lessor and the lessee. They predict that leasing is more likelyto occur if the value of the asset is not specialised to the firm. In this case, firms are likelyto lease generic office facilities than more firm-specific production and research anddevelopment facilities. They also predict that leasing is likely to occur if the lessor hasmarket power and if the lessor has comparative advantage in asset disposal. Similarconclusions are reached by Williamson (1988) who concludes that assets that are easilyredeployable, i.e., assets with resale value and not firm-specific, are likely to be leased.
Empirically, the extent to which leasing is determined by the resolution of potentialagency conflicts is difficult to test. The main reason relates to the lack of data onfirm’s asset types. However, previous studies have used a number of proxy variablesto measure the impact of asset type on leasing propensity. The first proxy variable isthe industry factor. Assets used by firms in a particular industry could easily beidentifiable and their suitability for leasing could be assessed. For example, Finucane(1988) and Krishnan and Moyer (1994) find that leasing activity is more prevalent incertain industries than in others. In particular, firms in transportation, services andwholesale and retail trade are more likely to use leasing. This suggests that assetsleased in these industries, such as aircraft and retail space, are easily redeployable.Moreover, Finucane (1988) shows that firms that use mortgage secured notes or bondsare more likely to use leasing. This suggests that firms with assets that make goodcollateral are also likely to have assets conductive to leasing.
The second proxy variable is the split of firm’s market value into assets in place andthe proportion of the value that is accounted for by future growth opportunities.There are a number of mechanisms that can be used to reduce the agency problemsbetween managers and shareholders. Under the agency cost framework, firms with ahigher proportion of growth opportunities should use less debt financing to mitigatethe underinvestment problem (Myers, 1977). Stulz and Johnson (1985) demonstratethat high-priority claims, such as leasing, can help reduce the underinvestmentproblem. Empirically, Barclay and Smith (1995) find that firms with greater growthopportunities, as measured by book-to-market ratio, rely more heavily on leasefinancing. Barclay and Smith (1995) also use the special case of regulated companiesto test for the effect of investment opportunities on leasing. They argue that regulationreduces the possibility for corporate underinvestment because the regulator overseesthese firms’ investments decisions. They find that regulated firms, such as gas, electricutilities and telecommunications, use lower proportion of capitalised leases but higherlong-term debt and ordinary debt.
An alternative mechanism that can work to reduce the agency problem is theownership structure (Shleifer and Vishney (1986)). Smith and Wakeman (1985)consider the potential role of ownership structure as a determinant of leasing activity.They predict that leasing is more likely to occur if the firm is closely held becauseleasing acts as a risk reduction mechanism for such firms, especially if the lessor has a
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comparative advantage in disposing of the asset in the second hand market.Empirically, Mukherjee (1991) show that the desire to lay off obsolescence risk is oneof the motives for leasing. Mehran and Taggart (1996) find that firms with highproportion of insider ownership engage more in leasing.
The third proxy variable used for asset type is firm size. Firm size can be a measure ofthe extent to which firms have the ability to redeploy assets internally. Largediversified firms are less likely to lease assets because they are less concerned withredeployment possibilities. Empirically, Barclay and Smith (1995) and Sharpe andNguyen (1995) find that large firms are less likely to rely on leasing than smaller firms.
3. Data and Methodology
We analyse financial statements of all unquoted and publicly quoted UK companies forwhich the financial and accounting data is available in machine readable form. Ourstudy covers a total of 3,008 individual companies over the period 1982 to 1996resulting in 23,411 pooled time-series and cross-sectional observations. To avoidsurvivorship bias, we include in our sample live as well as companies that were delistedduring our sample period due to bankruptcy or takeover.
Our analysis in centred on finance lease and hire purchase and exclude operating leasewhich is a short-term cancellable lease.2 We use the amount reported under “FinanceLease and Hire Purchase” in the “borrowing” section of each individual company’sbalance sheet to document the extent to which leasing contributes to the financing ofsmall and medium-sized firms’ growth and survival. We use publicly availableinformation, including annual reports, Extel Financial and Datastream, to extract therelevant data for all our sample. We classify each individual company into financialyears spanning from 1 April of year t to 31 March year t+1, depending on the date ofits year-end. For example, 1995 includes all UK companies with year-ends between 1April 1995 to 31 March 1996.
Table 1 reports the annual distribution of the total number of companies covered in thispaper, and the number and the proportion of companies that reported “Finance Leaseand Hire Purchase” in their annual reports the total number of companies covered inthis paper. The number of companies included in our analysis ranges from 37 in 1982to 2,650 in 1993. The rise between 1982 and 1993 in the number of companies andthe slight reduction in the number of companies in 1994 and 1995 is due to coveragevariations by the database vendors.
Up to 1984 the number of companies that use leasing is relatively low. During the1982-84 period, the reported figure of finance lease and hire purchase is not likely toreflect the actual lease commitments because companies were able to report their
2 Unlike operating leases, the capitalisation of finance leases is mandatory after the advent ofSSAP21 in 1984. This accounting standard, extended recently by FRS5, specifically defines a financelease as a lease that transfers substantially all the risks and rewards of ownership of an asset to thelessee. All other leases should be accounted for as operating leases. SSAP21 stipulates that leasedassets must be included among fixed assets and that future rental obligations be recorded as liabilitiesunder “Finance Lease and Hire Purchase” in the “Borrowings” section of the balance sheet.
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leases in the off-balance sheet financing section. In contrast, the 1985-1995 periodprovides a better appreciation of the intensity of the use of leasing in the UK as in 1984companies had to comply with the requirements of SSAP21. The proportion ofcompanies that use leasing has risen substantially between 1985 and 1988. Forexample, in 1988, out of 1,895 companies included in our sample, 1,052 companies(55.5 per cent) reported Finance Lease and Hire Purchase in their accounts. Over thesample period 1988 to 1995, the majority of companies in the UK use leasing. Onaverage, the proportion of companies that use leasing over the whole sample period is54.5 per cent; 57 per cent of our sample of quoted companies and 52 per cent of oursample of unquoted companies.
[Insert Table 1 here]
We use univariate and logit regressions to analyse the determinants of firms’ leasingdecision. A number of proxy variables are defined to test the hypotheses developed inthe previous section. To evaluate the tax impact on the decision to lease rather thanbuy assets, we define the following variables:3
1. Tax charge/Profit before tax: This variable is expected to capture firms’effective corporate tax rates. In general, the reported tax charge in theprofit and loss account is not equal to the profit before tax times thestatutory corporation tax rate. The taxable profit is adjusted for thefollowing factors:
• expenses that are disallowed or income which is tax-free or taxed ata rate other than that of the UK Corporation Tax;
• proportion of tax to be paid at some time, but not in the year beingreported upon;
• losses and/or unrelieved Advanced Corporation Tax (ACT) carriedforward.
Companies for which the above adjustments are high will have lower taxcharges. If leasing is motivated by the firm’s tax position, the ratio of taxcharge over profit before tax should be lower for lessee companies.
2. Tax recoverable: This variable is the reported corporation tax, other thanAdvanced Corporation Tax, carried in the accounts to be set against futurecorporation tax liability. This variable is expected to be higher for lesseecompanies if leasing is driven by tax savings. To account for sizedifferences, we also report results based on the ratio of tax recoverable tototal assets.
The following additional tax variables are specific for quoted companies:
3 For full description of the UK tax system see, for example, Deveureux, 1987, Lasfer, 1995, Lasfer,1996, and Levis, and Morgan, 1985.
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3. ACT recoverable: This variable is the amount of ACT that is to be setagainst future tax liability. Under the UK imputation system, firms have topay income tax at the basic rate on behalf of shareholders on each unit ofdividend distributed. This tax is then deducted from the corporation taxliability if earnings on which dividends are paid are generated in the UK andif taxable profits are positive. We assume that ACT recoverable reported inthe accounts is the result of tax losses. Thus, companies with high ACTrecoverable are likely to use leasing to save in taxes. This variable isdeflated by total assets and market value of equity.
4. Provision for ACT recoverable: This variable is the amount of provisionset by firms to account for possible non-recoverability of ACT. Thisvariable should be high for lessee companies if leasing is driven by taxconsiderations. This variable is deflated by total assets and market value ofequity.
5. ACT written off: If the recoverability of ACT is not certain in theforeseeable future, companies are allowed to write off ACT againstreserves. Thus companies with high ACT written off are likely to be taxexhausted and thus, likely to use leasing. This variable is deflated by totalassets and market value of equity.
In order to assess the impact of agency costs effects on leasing we define the followingvariables to measure growth opportunities:
• Additions to Other Tangible Fixed Assets: This variable is the reportedfixed capital investment in the firm’s cash flow statements. It excludesproperty and investments. The higher this variable, the higher the growth,thus the high the leasing propensity. This variable is also deflated by totalassets to account for size differences across firms.
• R&D/Sales: This variable is the reported research and development costs inthe firms’ profit and loss account, deflated by total sales. We assume thatgrowth firms have high R&D propensity. However, this variable mayreflect asset specificity, thus lower leasing, than growth.
• Sales growth: This variable is the average percentage change in turnoverover two consecutive financial years. Companies with high sales growthare assumed to be at growth stage.
• Payout ratio: This variable is the ratio of dividend over earnings. It isincluded only for quoted companies for which the data is available. It isexpected that growth firms should pay less dividends compared to maturecompanies.
• Tobin’s q: This variable is the ratio of market value of equity toshareholders’ fund. Tobin’s q is extensively used in the literature tomeasure growth opportunities. The higher this variable the higher the firm’sgrowth opportunities, and the higher the leasing propensity.
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In order to determine the impact of debt financing on the leasing propensity of oursample firms, we construct the following variables:
• Gearing: This variable is the ratio of long-term debt to capital employed.Capital employed is defined as the sum of long-term debt plus book valueof equity. If leasing is a substitute for debt financing, we would expectlessee companies to exhibit lower gearing ratios than non-lessee companies.
• BKL/TD: This variable is the ratio of bank loan and overdraft to total debt.This ratio measures the extent to which firms with high bank loans andoverdraft use leasing because they are prevented from increasing their loancommitments and/or that leasing is a relatively cheaper source of financethan bank loans.
We define the following variables to analyse the link between the probability of usingleasing and firm’s profitability:
• PBIT: This variable is the profit before interest and tax.
• PBT: This variable is the profit before tax, i.e., PBIT less tax charge.
• ROE: This variable is the return on equity, i.e., earnings divided byshareholder’s funds.
• EPS: This variable is the earnings per share, adjusted for any capital changes.
• DPS: This variable is the dividend per share, adjusted for any capital changes.
• Dividend Yield: This variable is the ratio of dividend per share to year-endshare price.
4. Empirical Results
In this section we present our empirical results. We first discuss the results based onUnivariate analysis where the difference between lessee and non lessee firms in each ofthe potential determinant of leasing is analysed. In the second sub-section the jointhypotheses are explored through the logit regressions.
4.1. Univariate analysis
In this section, we analyse determinants of the leasing decision. We do this bycomparing the size, tax position, debt-equity ratio, growth opportunities andprofitability of lessee and non-lessee companies. We carry this analysis, first, for thewhole sample, and then we split the sample into large medium and small firms and intoquoted and unquoted firms.
4.1.1 Leasing and firm’s size
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Table 2 presents a summary of the size differences between lessee and non-lesseecompanies and quoted and unquoted companies. Panel A of Table 2 shows that oursample as a whole is split into 54.5 per cent lessee firms and 45.5 per cent non-lesseecompanies.4 This coverage is not size or quotation status dependent as shown in PanelB, and Panel C of Table 2.
Panel A of Table 2 also shows that the average leasing propensity, i.e., the ratio ofFinance Lease and High Purchase to Total Debt, of all lessee companies in the sampleis 21.60 per cent. However, the distribution of leasing propensity across firm size isnot homogeneous. Leasing represents 12.76 per cent of total debt for largercompanies, 22.20 per cent for medium-sized companies (decile 5) and 33.89 per centfor smaller firms. This size difference is also apparent in the case of quoted (Panel B,Table 2) and unquoted companies (Panel C, Table 2). Larger lessee quoted companiesare financed at 9.33 per cent through leasing, while smaller companies’ leasing amountto 34.85 per cent of their total debt. Unquoted large and medium-sized companieshave a higher leasing propensity than quoted companies, partially because quotedcompanies are larger than unquoted ones. Our results are consistent with the USevidence5 and suggest that smaller companies are much more in need for leasing thanlarger firms.
Table 2 reports also size differences between lessee and non-lessee companies andbetween quoted and unquoted companies. In general, lessee companies are of thesame size or even larger than non-lessee companies. For example, smaller lesseecompanies have higher total assets than smaller non-lessee companies. In contrast,larger and medium-sized lessee companies have higher turnover and market value ofequity than non-lessee companies. Furthermore, as expected, quoted companies arelarger than non-quoted companies, whether size is defined in terms of total assets orturnover.
[Insert Table 2 here]
4.1.2 Leasing and firms’ tax capacity
To analyse the tax impact on leasing, we compare the tax position of companies thatreported Finance Lease and Hire Purchase in their accounts against companies that didnot use leasing. Table 3 reports the mean and the t-statistics of the tax differencesbetween lessee and non lessee firms. Panel A, Table 3 shows that, for all lesseecompanies in our sample, the average tax charge over profit before tax (Tax/PBT) is24.46 per cent. In contrast, for the non-lessee firms, the average is 29.2 per cent.While both these two rates are substantially lower than the average standard rate ofcorporation tax of about 35.5 per cent, lessee companies pay, on average, lower taxthan non lessee. The difference between the two rates is not, however, statisticallysignificant. Similarly, the differences in the effective corporate tax rates between thelarge, medium-sized and small lessee and non-lessee companies are not significant.
Panel A, Table 3 reports also tax recoverable differences between lessee and non-lessee companies. Lessee companies exhibit significantly higher levels of tax
4 See Table 1 for time-series distribution of our leasing and non-lessee firms.5 See, for example, Barclay and Smith (1995) and Sharpe and Nguyen (1995).
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recoverable (Tax rec.) than non-lessee firms. Our lessee companies have reported,over the sample period, an average of £1.13 million of tax recoverable, while non-lessee companies have reported only an average of £650,000. This significant contrastis observed also for large, medium-sized and small firms and when tax recoverable isdeflated by total assets (Tax rec./TA). These results suggest that, when companies arenot able to deduct all their allowances from their taxable profits, they prefer to lease,instead of borrowing and buying their assets.
Panel B, Table 3 reports the results for quoted companies. Despite the fact that lesseecompanies have lower effective tax rates (Tax/PBT), the difference between lessee andnon-lessee companies is not statistically significant. However, the other alternative taxmeasures provide strong support for the tax effects on leasing. Lessee companieshave, on average, higher tax recoverable, higher ACT recoverable (ACTR), set uplarger provisions for ACT recoverable (Pr. ACT) and write off larger amounts of ACT(ACTWO) against their reserves than non-lessee companies. These tax variables arealso significantly larger for lessee firms when they are deflated by total assets (TA) ormarket value of equity (ME). These results hold also, but to a lesser extent, formedium-sized companies. For small quoted companies, the tax effect on leasing is lessstrong. Small lessee companies have higher tax carry-forward and relative ACTrecoverable than non-lessee companies.
Panel C, Table 3 reports the results for the unquoted companies. Unlike the resultsreported for the quoted companies sample, taxation cannot explain fully the leasingdecision of the unquoted companies. For example, small unquoted companies havesignificantly larger effective corporation tax rates (Tax/PBT) than non-lesseecompanies. Similarly, all unquoted lessee companies report, on average, a lower levelof tax recoverable (Tax rec.) than non-lessee companies. These two results are notconsistent with the tax propositions and suggest that, for unquoted companies, thedecision to lease is not driven by tax savings. However, medium-sized companies’leasing decision is driven by taxation. They reported an average of £0.05 million ofrecoverable tax against £0.02 million reported by non-lessee companies. Thisrepresents 0.14 per cent of the lessee companies’ total assets and 0.05 per cent for thenon-lessee companies. The differences in both these variables between the lessee andthe non-lessee companies are statistically significant. Furthermore, smaller lesseeunquoted companies also report higher relative tax recoverable than the non-lesseecompanies. The difference between the two groups is not, however, statisticallysignificant.
[Insert Table 3 here]
4.1.3 Leasing and Firm’s growth opportunities
Agency and contracting costs could also drive the leasing decision. Under thisframework, leasing is more likely to occur if the asset is not specialised to the firm andif it is easily redeployable. It is predicted, for example, that large diversified firms areless likely to lease because they are less concerned with external redeploymentpossibilities and that firms with high growth opportunities should rely more on leasing.
Table 4 reports the growth differences between lessee and non-lessee companies. Asexpected, lessee have significantly larger additions to other tangible fixed assets (add.
14
OTFA) than non-lessee companies independently of whether they are quoted orunquoted. In contrast, difference in R&D propensity is not statistically significantbetween the lessee and non-lessee companies for all, quoted and unquoted companies.However, this variable is likely to measure firm’s asset type. It suggests that firms arenot likely to lease their specific production and research and development facilitiesbecause these assets are specialised to them. Thus, firms are likely to buy these assetsthan to engage in leasing. The lessor’s incentive to lease may be reduced and therental payments for the lease of these specific assets may be very high because thelessor has no comparative advantage in disposing of the assets. Sales growth is onlysignificant for the case of all and quoted large firms (Panel A and Panel B, Table 4.)
Panel B, Table 4 reports the main difference between lessee and non-lessee companiesin growth potential, as measured by Tobin’s q. For all quoted companies, lesseecompanies have significantly larger Tobin’s q than non-lessee firms. The averagemarket value of equity to book value of equity for all quoted lessee companies is 3.63,while that of the non-lessee companies is 2.58. However, this statistically significantdifference is observed only for small quoted companies. For larger and medium-sizedcompanies, leasing decision is not driven by growth potential.
Panel B, Table 4 reports also the dividend payout differences between the lessee andthe non-lessee companies. Although, in most cases lessee companies exhibit lowerdividend payout ratios than non-lessee companies, the difference between the twogroups is not statistically significant. This may be due to the fact that dividends conveyinformation to the market and that managers have not a total discretion over theamount they have to pay.
[Insert Table 4 here]
In sum, our results provide a strong evidence on the effect of growth potential on theleasing decision. Firms with high fixed assets investments are more likely to useleasing. However, firm specific fixed assets are not likely to be leased. Finally, smallfirms with high growth opportunities are more likely to lease than to buy their assets.Our results suggest that leasing contributes significantly to the financing of growth ofUK companies.
4.1.4 Leasing and firm’s debt capacity
Previous studies show that leasing is a substitute for debt finance. Table 5 presents thegearing differences between the lessee and non-lessee companies. Panel A shows that,on average, companies with significantly high gearing and those with substantiallylower bank commitments are likely to engage in leasing. However, the distribution ofthese variable across large, medium-sized and small firms is not homogeneous. Largelessee companies have, in fact, significantly higher gearing and are more committed tobank loans than non-lessee companies. Thus, for large firms, leasing tends to beassociated with high debt finance. In contrast, medium-sized and small lessee firms aresignificantly less committed to bank financing. Medium and smaller non-lessee firmsexhibit significantly higher ratio of bank loans and overdrafts than lessee firms. Thus,for medium-sized and smaller firms leasing is a substitute for debt finance. These firms
15
gearing is not statistically different from their lessee counterparts. Similar results areshown for the case of quoted companies (Panel B, Table 5) and for unquotedcompanies (Panel C, Table 5).
[Insert Table 5 here]
In sum, the gearing differences between lessee and non-lessee firms is nothomogeneous across firms of different size. While for the whole sample lesseecompanies have, on average, higher gearing and lower relative bank loans, than non-lessee companies, for large companies leasing and debt finance are complement and formedium-sized and smaller firms, leasing and debt finance are substitutes. The resultssuggest that for medium-sized and smaller firms leasing is a cheaper source of finance.Similar to US evidence6, our results also imply that leasing is widely used by riskierand less-established firms.
4. 1. 5 Leasing and firm’s profitability
In this section, we provide empirical evidence on the relationship between leasingpropensity and firms’ profitability. Previous studies show that leasing is used by lessprofitable companies, i.e., companies with high premiums for external funds. Table 6provides the empirical results on the profitability differences between lessee and non-lesseecompanies. Panel A, Table 6 shows that, on average, all our lessee companies are moreprofitable than non-lessee companies. For example, the average profit before interest andtax of lessee companies amounts to £36.4 million while that of non-lessee companies is£29.90 million. The difference between these two groups is statistically significant. Largelessee companies are, also, more profitable than non-lessee companies. Large lesseecompanies have significantly higher profit before interest, profit before tax, and, to a lesserextent, higher return on equity, than non-lessee firms.
This relationship does not hold, however, for medium-sized and smaller firms. Inparticular, smaller lessee companies have significantly lower profit before interest and taxthan non-lessee companies. On average, the profit before interest and tax of small lesseecompanies is about £1,000 while that of non-lessee companies is £21,000. The sameapplies for profit before tax and return on equity, but the difference between lessee andnon-lessee companies is not statistically significant.
Panel B, Table 6 reports the results of profitability differences between quoted lessee andnon-lessee companies. All quoted lessee companies generate higher profit before interestand tax and profit before tax than non-lessee companies. Although the other profitabilitymeasures are higher for lessee than for non-lessee companies, the difference between thetwo groups is not statistically significant. Larger quoted lessee companies have also higherprofit before interest and tax, higher profit before tax and significantly higher yield thannon-lessee firms. Similarly, medium-sized lessee companies have substantially higherprofits, but lower yield, than non-lessee companies. For smaller companies, leasingpredominates among less profitable companies. In particular, small lessee companies havesignificantly lower profit before interest and tax, lower earnings per share and lowerdividend per share than non-lessee firms. Our results suggest that for large and medium-
6 See, for example, Krishnan and Moyer (1994).
16
sized quoted companies, leasing contributes to firms’ profitability while, for smallcompanies, leasing contributes to their survival.
Panel C, Table 6 provide the results for the non-quoted companies. On average, all andlarge lessee unquoted companies have lower profit before interest and tax than non-lesseecompanies. However, large lessee unquoted companies have higher profit before tax thannon-lessee companies. Although small unquoted companies with leasing in their capitalstructure have lower profit before tax and higher profit before interest and tax and return onequity, the difference between the two groups is not statistically significant.
[Insert Table 6 here]
Therefore, in sum, our results suggest that leasing to large companies is associated withprofitability; large profitable companies are those that lease rather than buy their assets. Incontrast, for small companies. leasing is associated with low profitability. Small lesseecompanies exhibit, on average, lower earnings and accounting returns than non-lesseecompanies. Our results imply that leasing contributes to the survival of smaller companies.
4.2 Logit analysis
In this section we present the results of the logit regressions. The dependent variableis a dummy variable equal to 1 if the firm is using leasing and to zero otherwise.
Table 7 reports the results for all companies in the sample and for quoted andunquoted companies. The results show that, for all companies in the sample, taxrecoverable, additions to fixed assets, leverage and size are all positively correlated tothe probability of using leasing. The results are relatively similar for quotedcompanies. Companies with high tax carry-forward, ACT recoverable and those thatexpect to have difficulties in recovering their ACT (i.e., those that set high provisionfor ACT recoverable) are more likely to lease than buy the asset. Our results areconsistent with US evidence (e.g., Barclay and Smith (1995), Sharpe and Nguyen(1995) and Graham et al (1997)) and suggest that capitalised leases are used moreheavily by firms for which the tax-benefits of ownership appear low. The results alsoshow that the probability of leasing by quoted companies is positively related togrowth opportunities as measured by additions to fixed assets and Tobin’s q, toleverage and to firm’s size. However, leasing is not associated with research anddevelopment expenditures. Our results are consistent with Barclay and Smith (1995)and suggest that leasing mitigates the agency conflicts.
The last five columns of Table 7 report the results for unquoted companies and showthat leasing is not driven by tax variables, but only by investments in fixed assets,leverage and size. Given that size is the main difference between quoted and unquotedcompanies, our results suggest that, leasing of small companies is not likely to bedriven by tax factors.
[Insert Table 7 here]
17
Table 8 expands these results by analysing the determinants of leasing of only smallcompanies (the first decile sorted by total assets). Tax variables are either notsignificant or significant but with the wrong sign. The results suggest that small firmsdo not lease to save in taxes. Instead, the results show that investments in fixed assets,Tobin’s q, leverage and size are positively related to the probability of leasing. Inaddition profitability is negatively related to leasing suggesting that less profitable smallfirms are more likely to use leasing than buying the assets. Our results are consistentwith US evidence (e.g., Krishnan and Moyer (1994) and Sharpe and Nguyen (1995))but suggest that lease financing becomes an attractive financing option for only smallfirms that are in financial distress. However, given the high growth options of smallfirms that use leasing, their relatively low profitability may be due to their operatingexpenses than to their inefficiency.
[Insert Table 8 here]
Table 9 reports the results of the largest companies in the sample (the tenth decile).The results show that various tax measure are correctly signed and significant. Incontrast, Tobin’s q, which measures growth opportunities, is not significant. Theresults suggest that, unlike small companies, large firms are not likely to lease tofinance their growth potentials. For large quoted companies, our results indicate thatprofitable companies, as measured by EPS, are more likely to lease their assets.However, size, as measured by the total assets is negatively related to leasing. Theresults suggest that large companies with low assets are more likely to lease.
[Insert Table 9 here]
5. Conclusions
The purpose of our analysis is to determine the extent to which leasing is supportingthe level of fixed investment undertaken by various size companies in the UK. To dothis, we analysed financial statements of more than 3,000 individual companiesregistered in the UK over the 1982-1995 sample period. We analyse the probability ofusing leasing by comparing the financial performance and other characteristics ofcompanies that reported financial lease and hire purchase in their accounts tocompanies that did not.
We show that, for the sample as a whole, companies that use leasing are more likely tohave tax losses, high debt-to-equity ratio and to be larger than companies that do notuse leasing. In particular, our results show that companies with high fixed capitalinvestment are more likely to use leasing than companies with low additions to otherthan buildings and property tangible fixed assets. Our results suggest that leasingcontributes significantly to the financing of fixed capital formation of a large number ofUK companies and imply that without leasing many projects would not have beenundertaken.
Our results reveal, however, that the reasons for leasing are not the same acrosscompanies of different size. We show that, for small firms, taxation is not the majordeterminant of leasing. Instead, leasing is driven by growth opportunities; small
18
growth firms are more likely to lease than small mature companies. Furthermore, ourresults show that leasing allows small companies to survive. We show that small lessprofitable companies are more likely to lease than other small cash-generating firmsand small lessee firms have, on average, substantially lower bank borrowing than non-lessee companies. While these results imply that these lessee firms cannot access thedebt market because of their low profitability, they could also suggest that, because ofpotential internal and external agency costs, small growth firms prefer to lease than toborrow-and-buy their assets. Similarly, the lack of profitability of small lessee firmscould be due to the financing of their growth opportunities.
For large firms, leasing appears to be driven by tax savings. We show that large firmsthat lease their assets are more likely to have high tax carry-forward and, for quotedcompanies, high ACT surplus than non-lessee firms. Leasing is also driven byprofitability. Large lessee companies are, in general, more profitable than non-lesseecompanies. Moreover, for these large companies, leasing is a complement to debtfinancing. We show that large lessee firms have, on average, substantially higherrelative bank loans than non-lessee companies. Our overall results suggest that leasingallows small firms to finance their growth and/or survival while for large firms, leasingappears to be a financial instrument used by sophisticated financial managers tominimise their after-tax cost of capital.
19
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21
Table 1. Sample Characteristics
N is for the number of companies in the total sample or quoted and unquotedsubsamples; % is the proportion of companies that use leasing.
Years All Sample Quoted Unquoted Total Assets of AllSample (£m)
N % N % N % Mean Min. Max.19821983198419851986198719881989199019911992199319941995
37157293583
1,5191,7051,8952,3262,4932,5392,5112,6502,6042,099
10.814.728.734.540.850.355.554.955.257.359.160.759.660.1
38
33109832958
1,0931,3701,4521,5161,5841,7401,8231,785
0.00.0
27.337.642.052.557.155.856.150.060.160.959.160.2
34149260474687747802956
1,0411,023927910781314
11.815.428.933.839.547.453.453.653.956.357.560.360.859.9
149100171155270275345504616605890935
1,0771,293
00000000000000
1,3001,8596,9046,41151,57746,25257,73463,529
121,100122,569185,141207,447201,518226,818
All 3,008 54.5 1,838 57.0 1,170 51.7 691 0 226,818
22
Table 2. Size differences between lessee and non-lessee companiesThe sample-firms is split into large (decile 10), medium-sized (decile 5) and small firms(decile 1) and into quoted and unquoted companies depending on whether the relevantcompany was trading on the London Stock Exchange at that particular time period.lessee firms are firms that reported Finance Lease and Hire Purchase in the Borrowingsection in their Balance Sheet. % is the proportion of observations in each sub-sample;FLHP/TD is the ratio of Finance Lease and Hire Purchase over Total Debt; N is thenumber of observations for each sub-sample. There are 23,411 total usableobservations, 14,306 for quoted companies and 9,105 for unquoted companies. *significant at 0.01 level.
All Companies LargeCompanies
Medium-sizedCompanies
SmallCompanies
Lessee Non-lessee
Lessee Non-lessee
Lessee Non-lessee
Lessee Non-lessee
Panel A. All companies in the sample
%FLHP/TD %NTotal Assets£m
Sales £m
54.5021.6012,759758.0
421.0
45.500.0010,652776.0(-0.23)216.0*(10.4)
52.3212.761,2256,673
2,940
47.680.001,1167,054(-0.53)1,236*(9.70)
55.4022.201,29738.30
70.60
44.600.001,04438.50(-1.28)58.20*(5.55)
55.7033.891,3043.30
6.20
44.300.001,0372.80*(7.40)6.20(-0.04)
Panel B. Quoted companies
%FLHP/TD %NTotal Assets£m
Sales £m
Market Valueof Equity £m
57.019.928,154956.0
496.0
380.0
43.00.006,152839.0(1.02)212.0*(9.41)280.0*(4.51)
55.489.337947,650
3,381
2,673
44.520.006377,748(-0.40)1,565*(7.41)2,103*(3.32)
57.8021.3082738.20
59.70
38.70
42.200.0060438.50(-1.52)33.60*(13.84)41.02(-0.92)
56.2034.858043.40
5.70
10.50
43.800.006272.90*(5.33)6.30(-0.38)11.30(-0.52)
Panel C. Unquoted companies
%FLHP/TD %NTotal Assets£m
Sales £m
51.7625.534,713417.0
291.6
48.240.004,392682.0*(-4.0)222.7*(4.75)
45.6421.594164,159
1,804
54.360.004956,035*(-2.73)754.0*(8.93)
52.2023.5247638.40
86.90
47.800.0043538.40(-0.19)89.30(-0.58)
54.4031.604963.10
7.30
45.600.004152.50*(5.27)6.06(0.97)
23
Table 3. Tax differences between lessee and non-lessee companiesThe sample-firms is split into large (decile 10), medium-sized (decile 5) and small firms (decile 1)and into quoted and unquoted companies depending on whether the relevant company was trading onthe London Stock Exchange at that particular time period. lessee firms are firms that reportedFinance Lease and Hire Purchase in the Borrowing section in their Balance Sheet. Tax/PBT is theratio of tax charge as reported in the Profit and Loss Account to Profit Before Tax. Tax rec. is taxcarry forward reported in the balance sheet. TA is total assets. ACTR is ACT recoverable. Pr ACTRis the provision for ACT recoverable. ACTWO is ACT written off. ME is the market value of equity.There are 26,479 total usable observations, 16,299 for quoted companies and 10,180 for unquotedcompanies. * significant at 0.01 level. ** Significant at 0.10 level.
All Companies Large Medium-sized SmallLessee Non-
lesseeLessee Non-
lesseeLessee Non-
lesseeLessee Non-
lesseePanel A. All companies in the sample
Tax/PBT
Tax rec. £m
Tax rec./TA
24.46
1.13
0.22
29.2(-1.39)0.65*(3.34)0.17*(3.74)
32.83
9.44
0.20
27.7(0.72)5.25*(3.03)0.14*(3.15)
31.94
0.08
0.21
55.9(-0.91)0.06*(2.03)0.15*(2.17)
20.39
0.009
0.35
17.7(0.96)0.005*(2.74)0.25*(1.95)
Panel B. Quoted companiesTax/PBT
Tax rec. £m
Tax rec./TA
ACTR £m
Pr. ACT £m
ACTWO £m
ACTR/TA
Pr ACT/TA
ACTWO/TA
ACTR/ME
Pr ACT/ME
ACTWO/ME
24.26
1.64
0.27
1.29
0.86
0.19
0.37
0.10
0.03
0.73
0.21
0.13
27.8(-1.40)0.83*(3.62)0.21*(3.18)0.90*(2.96)0.36*(4.51)0.09**(1.75)0.32*(4.33)0.05*(9.42)0.02*(2.80)0.61*(2.14)0.09*(6.04)0.08*(1.95)
25.88
12.40
0.25
8.40
6.70
1.50
0.33
0.20
0.05
0.75
0.50
0.29
26.7(0.18)6.90*(2.74)0.18*(2.66)7.20(1.33)3.30*(3.43)0.85(1.35)0.27**(1.82)0.05*(6.17)0.03*(2.56)0.52*(2.33)0.19*(2.99)0.14(1.12)
35.68
0.10
0.26
0.16
0.03
0.001
0.42
0.08
0.02
1.49
0.14
0.07
29.35(0.64)0.09*(0.55)0.24*(1.17)0.13*(1.95)0.02(0.48)0.001(1.04)0.35(1.78)0.06(0.45)0.02(0.90)1.06(0.37)0.08(0.18)0.06*(3.19)
20.88
0.011
0.45
0.013
0.009
0.0005
0.32
0.03
0.02
0.31
0.04
0.06
20.25(0.17)0.05*(2.62)0.31(0.95)0.013(0.24)0.001(0.19)0.003(1.12)0.29(1.78)0.02(0.29)0.02(0.48)0.29(1.78)0.03(0.68)0.05(0.19)
Panel C. Unquoted companiesTax/PBT
Tax rec. £m
Tax rec./TA
24.79
0.25
0.11
31.2(-0.84)0.39*(-1.94)0.10(1.04)
30.20
1.86
0.07
29.16(0.96)2.75(-1.17)0.08(-0.45)
26.41
0.05
0.14
33.3(-1.09)0.02*(3.46)0.05*(3.52)
19.20
0.003
0.13
12.0*(1.98)0.003(0.76)0.11(0.55)
24
Table 4. Growth differences between lessee and non-lessee companiesThe sample-firms is split into large (decile 10), medium-sized (decile 5) and small firms (decile 1)and into quoted and unquoted companies depending on whether the relevant company was trading onthe London Stock Exchange at that particular time period. lessee firms are firms that reportedFinance Lease and Hire Purchase in the Borrowing section in their Balance Sheet. Ad. OFTA are theadditions to other tangible fixed assets (i.e., excluding property and buildings); Tax rec. is tax carryforward reported in the balance sheet; TA is total assets; ACTR is ACT recoverable; Tobin’s q is theratio of market value to book value of equity. There are 26,479 total usable observations, 16,299 forquoted companies and 10,180 for unquoted companies. * significant at 0.01 level. ** Significant at0.10 level.
All Companies LargeCompanies
Medium-sizedCompanies
SmallCompanies
Lessee Non-lessee
Lessee Non-lessee
Lessee Non-lessee
Lessee Non-lessee
Panel A. All companies in the sampleAd. OTFA £m
Ad. OTFA/TA
R&D/Sales
Sales Growth
21.2
6.139
2.20
169
8.20*(9.58)3.33*(28.92)4.90(-0.83)137(0.27)
160
5.02
1.27
11.02
57.0*(8.14)2.22*(13.40)0.94(0.91)6.83*(2.26)
2.20
5.76
0.78
131.8
1.30*(9.05)3.43*(9.08)0.27(1.23)39.4(1.38)
0.214
6.56
11.64
165.2
0.117*(4.95)3.43*(6.89)37.60(-0.96)78.8(0.99)
Panel B. Quoted companies
Ad. OTFA £m
Ad. OTFA/TA
R&D/Sales
Sales Growth
Payout ratio
Tobin’s q
27.10
6.64
2.77
240
49.70
3.63
8.90*(8.76)3.13*(27.53)8.60(-0.98)112(0.77)52.40(0.21)2.58*(10.3)
193.6
5.66
1.50
12.89
90.40
2.28
69.60*(7.21)2.51*(12.13)1.07(0.90)7.32*(2.15)50.77(1.20)2.40(-0.72)
2.50
6.40
1.19
118.3
34.79
2.53
1.25*(8.53)3.27*(8.55)0.40(1.38)27.60(1.49)48.17(0.32)2.01(0.42)
0.23
6.90
12.03
214
15.83
9.90
0.14*(3.34)3.66*(5.56)52.20(-1.05)105(0.88)23.67(-1.61)5.19*(6.91)
Panel C. Unquoted companiesAd. OTFA £m
Ad. OTFA/TA
R&D/Sales
Sales Growth
11.0
5.28
1.22
47.8
7.2*(4.36)3.62*(11.15)0.55(1.17)173(0.82)
73.9
3.39
0.59
6.22
39.3*(3.85)1.79*(4.98)0.72(0.91)6.10(0.07)
1.80
4.79
0.18
152
1.40*(3.44)3.65*(3.44)0.16(0.20)54.20(0.72)
0.18
5.72
10.7
47.9
0.07*(5.45)2.91*(4.22)3.03(0.93)19.03(1.13)
25
Table 5. Gearing differences between lessee and non-lessee companiesThe sample-firms is split into large (decile 10), medium-sized (decile 5) and small firms (decile 1)and into quoted and unquoted companies depending on whether the relevant company was trading onthe London Stock Exchange at that particular time period. Lessee firms are firms that reportedFinance Lease and Hire Purchase in the Borrowing section in their Balance Sheet. Gearing is theratio of long-term debt to capital employed (long-term debt plus shareholders’ funds). BKL is for bankloans and overdraft. TD is total debt. There are 26,479 total usable observations, 16,299 for quotedcompanies and 10,180 for unquoted companies. * significant at 0.01 level. ** Significant at 0.10level.
All Companies LargeCompanies
Medium-sizedCompanies
SmallCompanies
Lessee Non-lessee
Lessee Non-lessee
Lessee Non-lessee
Lessee Non-lessee
Panel A. All companies in the sample
Gearing
BKL/TD
22.60
56.69
12.20*(2.86)65.31*(-16.8)
32.39
40.74
26.05*(2.03)34.21*(4.64)
21.80
59.55
13.19(1.40)71.52*(-7.55)
6.60
50.24
9.78(-0.76)73.77*(-13.4)
Panel B. Quoted companies
Gearing
BKL/TD
19.60
57.91
13.20*(2.13)63.81*(-8.99)
32.72
42.43
26.01(1.62)35.94*(3.96)
14.58
60.49
11.60(1.02)69.68(-0.37)
5.90
49.99
8.27(-0.76)73.78*(-11.2)
Panel C. Unquoted companies
Gearing
BKL/TD
27.74
54.58
10.60*(2.18)67.40*(-15.6)
31.54
36.39
26.12(1.67)31.21*(1.96)
32.50
58.17
15.20(1.28)73.71*(-6.61)
13.39
50.84
13.17(0.03)73.74*(-7.26)
26
Table 6. Profitability differences between lessee and non-lessee companiesThe sample-firms is split into large (decile 10), medium-sized (decile 5) and small firms (decile 1)and into quoted and unquoted companies depending on whether the relevant company was trading onthe London Stock Exchange at that particular time period. lessee firms are firms that reportedFinance Lease and Hire Purchase in the Borrowing section in their Balance Sheet. PBIT is the profitbefore interest and tax; PBT is the profit before tax; ROE is return on equity, the ratio of earnings toshareholders funds; ROCE is the return on capital employed, the ratio of profit before interest and taxto long-term debt plus shareholders’ funds; EPS and DPS are earnings per share and dividend pershare, respectively. There are 26,479 total usable observations, 16,299 for quoted companies and10,180 for unquoted companies. * significant at 0.01 level. ** Significant at 0.10 level.
All Companies LargeCompanies
Medium-sizedCompanies
SmallCompanies
Lessee Non-lessee
Lessee Non-lessee
Lessee Non-lessee
Lessee Non-lessee
Panel A. All companies in the sample
PBIT £m
PBT £m
ROE
36.4
17.6
12.0
29.90*(2.19)9.70*(4.06)9.20(0.98)
299.0
160.0
25.15
231.0*(2.54)81.0*(4.37)12.85(1.49)
3.30
0.36
12.46
3.10(1.01)3.70(0.95)6.79(0.73)
0.001
-0.038
-65.9
0.21*(-2.12)-0.002(-1.84)-21.5(-1.17)
Panel B. Quoted companies
PBIT £m
PBT £m
ROE
EPS (p)
DPS (p)
Dividend Yield
48.16
26.70
13.10
0.35
0.105
3.05
31.80*(3.71)15.10*(3.82)7.60(1.59)0.09(1.38)0.05(1.36)3.05(0.01)
362.0
215
22.91
0.23
0.13
3.82
250.0*(3.08)134.0*(3.18)14.56(1.03)0.20(1.48)0.11(1.73)3.48*(3.42)
3.30
0.61
14.18
2.91
0.63
3.05
3.10*(2.36)0.33**(1.87)12.0*(1.99)0.089(1.42)0.04(1.76)3.11*(-2.30)
-0.01
-0.05
-95.4
0.003
0.008
1.36
0.30*(-2.29)-0.005(-1.60)-13.7(-1.57)0.05*(-3.51)0.022*(-4.33)2.49(-1.79)
Panel C. Unquoted companies
PBIT £m
PBT £m
ROE
16.10
1.70
4.98
27.1*(-3.84)1.50(0.18)3.90(0.11)
138.0
16.80
30.9
202.0*(-2.15)3.10*(2.39)10.12(1.04)
3.10
-0.01
9.91
3.10(0.20)8.04(-1.00)0.20(0.62)
0.03
-0.01
4.60
-0.001(0.45)-0.003(-1.30)-39.2(1.28)
Table 7. Logit Regressions of the Probability of Using Leasing by All Companies in the 1982-1996 PeriodsColumn 1 reports the result for the tax hypothesis. Column 2 is for the financing of growth potentials. Columns 3 and 4 are for size differences. Column 5 is for all the hypotheses. TAX/PBT is the ratio of tax charge to profitbefore tax; Tax rec is tax carry forward; TA is total assets; ACTR is the reported recoverable advanced corporate tax; Pr ACTR is the ACT recoverable provision; ACTWO is the ACT written off; ME is year end market valueof equity; LTD is long-term debt; CE is capital employed; EPS is earnings per share; q is the ratio of market value to book value of equity; ln denotes the logarithm; SA is total sales; add. OFTA are the additions to other thanproperty and building tangible fixed assets; Sales G is for sales growth; * and ** significant at 0.01 and 0.10 levels, respectively.
All Companies All Quoted Companies All Unquoted Companies1 2 3 4 5 1 2 3 4 5 1 2 3 4 5
Constant
Tax/PBT
Tax rec/TA
ACTR/ME
Pr ACTR/ME
ACTWO/ME
Add OFTA/TA
R&D/Sales
Sales G
q
LTD/CE
EPS
ln(TA)
ln(Sales)
ln(ME)
0.49*
(155.2)-0.00
(-1.37)1.13*
(3.72)-
-
-
-
-
-
-
-
-
-
-
-
0.509*
(132.2)-
-
-
-
-
0.711*
(18.22)-0.00
(-0.14)0.001(0.83)
-
-
-
-
-
-
0.407*
(23.24)-
-
-
-
-
-
-
-
-
-
-
0.007*
(4.76)-
-
0.235*
(12.74)-
-
-
-
-
-
-
-
-
-
-
-
0.03*
(17.25)-
0.196*
(10.6)-0.00
(-1.69)2.65*
(7.23)-
-
-
0.71*
(18.3)-0.00
(-0.15)0.00
(0.02)-
0.002*
(2.36)0.004(1.34)
-
0.03*
(17.2)-
0.50*
(120.7)-0.00
(-1.40)1.01*
(3.16)0.20*
(1.96)1.90*
(5.68)0.11
(0.46)-
-
-
-
-
-
-
-
-
0.53*
(94.4)-
-
-
-
-
0.98*
(16.3)0.001(0.15)0.00
(0.23)0.002*
(3.67)-
-
-
-
-
0.41*
(18.9)-
-
-
-
-
-
-
-
-
-
-
0.009*
(4.67)-
-
0.43*
(19.7)-
-
-
-
-
-
-
-
-
-
-
-
-
0.007*
(3.45)
0.11*
(4.83)-0.00
(-1.12)3.83*
(7.07)-
0.90*
(2.84)-
0.84*
(15.9)-0.00
(-0.22)0.00
(0.05)0.002*
(3.77)0.41*
(17.5)0.0003(1.07)
-
0.03*
(15.1)-
0.47*
(91.7)-0.00
(-0.80)1.04
(1.03)-
-
-
-
-
-
-
-
-
-
-
-
0.46*
(76.8)-
-
-
-
-
0.59*
(8.74)-0.02
(-1.20)-0.00
(-0.79)-
-
-
-
-
-
0.41*
(13.3)-
-
-
-
-
-
-
-
-
-
-
0.006*
(2.13)-
-
0.26*
(7.92)-
-
-
-
-
-
-
-
-
-
-
-
0.02*
(6.71)-
0.24*
(7.12)-0.00
(-1.06)1.09
(1.04)-
-
-
0.58*
(8.70)-0.03
(-1.62)-0.00
(-0.83)-
0.002*
(1.98)-0.001(-0.24)
-
0.02*
(6.62)-
R2
NFp-value
0.123,4117.880.00
1.422,225110.90.00
0.123,41122.630.00
1.322,225297.70.00
2.922,22586.920.00
0.314,30610.420.00
2.113,21072.460.00
0.114,30621.850.00
0.113,21011.940.00
7.513,210108.420.00
1.29,105
128.160.00
0.89,01526.160.00
0.09,1054.550.03
0.59,01545.020.00
1.39,01516.180.00
Table 8. Logit Regressions of the Probability of Using Leasing by Small Companies in the 1982-1996 PeriodsColumn 1 reports the result for the tax hypothesis. Column 2 is for the financing of growth potentials. Columns 3 and 4 are for size differences. Column 5 is for all the hypotheses. TAX/PBT is the ratio of tax charge to profitbefore tax; Tax rec is tax carry forward; TA is total assets; ACTR is the reported recoverable advanced corporate tax; Pr ACTR is the ACT recoverable provision; ACTWO is the ACT written off; ME is year end market valueof equity; LTD is long-term debt; CE is capital employed; EPS is earnings per share; q is the ratio of market value to book value of equity; ln denotes the logarithm; SA is total sales; add. OFTA are the additions to other thanproperty and building tangible fixed assets; Sales G is for sales growth; * and ** significant at 0.01 and 0.10 levels, respectively.
All Small Companies All Small Quoted Companies All Small Unquoted Companies1 2 3 4 5 1 2 3 4 5 1 2 3 4 5
Constant
Tax/PBT
Tax rec/TA
ACTR/ME
Pr ACTR/ME
ACTWO/ME
Add OFTA/TA
R&D/Sales
Sales G
q
LTD/CE
EPS
ln(TA)
ln(Sales)
ln(ME)
0.42*
(41.6)0.00
(0.42)0.40
(1.06)-
-
-
-
-
-
-
-
-
-
-
-
0.45*
(40.1)-
-
-
-
-
0.39*
(4.63)0.001(0.96)0.00
(0.32)-
-
-
-
-
-
-0.14(-1.76)
-
-
-
-
-
-
-
-
-
-
-
0.07*
(7.25)-
-
-0.02(-0.35)
-
-
-
-
-
-
-
-
-
-
-
-
0.06*
(10.2)-
-0.05(-0.95)-0.00
(-0.89)1.30*
(2.49)-
-
-
0.33*
(4.07)-0.001(-0.49)
0.00(0.67)
-
-0.001(-0.44)-0.09*
(-3.05)-
0.06*
(10.3)-
0.43*
(33.6)0.00
(0.18)0.33
(0.87)-1.91**
(-1.73)-2.89
(-0.56)-0.11
(-0.08)-
-
-
-
-
-
-
-
-
0.38*
(22.7)-
-
-
-
-
0.78*
(5.14)0.001(0.82)0.00
(0.08)0.006*
(6.03)-
-
-
-
-
-0.14(-1.35)
-
-
-
-
-
-
-
-
-
-
-
0.07*
(5.57)-
-
0.07(0.85)
-
-
-
-
-
-
-
-
-
-
-
-
-
0.041*
(4.16)
-0.24*
(-3.4)-0.001(-0.88)0.58
(0.50)-4.24*
(-3.72)5.69
(0.97)-4.97*
(-2.42)0.66*
(4.56)-0.001(-0.77)0.00
(0.31)0.004*
(3.62)0.77*
(9.27)-0.07**
(-1.86)-
0.07(8.54)
-
0.4*
(21.7)0.006**
(1.84)1.67
(0.53)-
-
-
-
-
-
-
-
-
-
-
-
0.43(20.8)
-
-
-
-
-
0.55*
(2.87)-0.02
(-1.03)0.00
(0.77)-
-
-
-
-
-
-0.14(-1.13)
-
-
-
-
-
-
-
-
-
-
-
0.07*
(4.60)-
-
0.02(0.32)
-
-
-
-
-
-
-
-
-
-
-
-
0.06*
(5.61)-
0.004(0.06)0.003(0.95)2.35
(0.56)-
-
-
0.48*
(2.53)-0.03
(-1.58)0.00
(0.69)
-0.00(-0.00)-0.07
(-1.41)-
0.06*
(5.36)-
R2
NFp-value
0.02,3410.970.38
0.82,3317.600.00
1.92,34152.600.00
4.22,331103.30.00
5.72,33018.500.00
0.01,4310.860.51
4.31,42517.190.00
1.61,43130.980.00
0.91,42517.280.00
15.11,42522.230.00
0.29101.840.16
1.09053.380.02
2.5910
21.140.00
4.1905
31.470.00
5.09055.590.00
Table 9. Logit Regressions of the Probability of Using Leasing by Large Companies in the 1982-1996 PeriodsColumn 1 reports the result for the tax hypothesis. Column 2 is for the financing of growth potentials. Columns 3 and 4 are for size differences. Column 5 is for all the hypotheses. TAX/PBT is the ratio of tax charge to profitbefore tax; Tax rec is tax carry forward; TA is total assets; ACTR is the reported recoverable advanced corporate tax; Pr ACTR is the ACT recoverable provision; ACTWO is the ACT written off; ME is year end market valueof equity; LTD is long-term debt; CE is capital employed; EPS is earnings per share; q is the ratio of market value to book value of equity; ln denotes the logarithm; SA is total sales; add. OFTA are the additions to other thanproperty and building tangible fixed assets; Sales G is for sales growth; * and ** significant at 0.01 and 0.10 levels, respectively.
All Large Companies All Large Quoted Companies All Large Unquoted Companies1 2 3 4 5 1 2 3 4 5 1 2 3 4 5
Constant
Tax/PBT
Tax rec/TA
ACTR/ME
Pr ACTR/ME
ACTWO/ME
Add OFTA/TA
R&D/Sales
Sales G
q
LTD/CE
EPS
ln(TA)
ln(Sales)
ln(ME)
0.48*
(46.6)0.00
(0.74)6.13*
(3.16)-
-
-
-
-
-
-
-
-
-
-
-
0.57*
(38.5)-
-
-
-
-
1.01*
(5.45)-0.10
(-0.80)-0.00
(-0.54)-
-
-
-
-
-
1.10*
(8.55)-
-
-
-
-
-
-
-
-
-
-
-0.04*
(-4.73)-
-
-0.21(-1.42)
-
-
-
-
-
-
-
-
-
-
-
-
0.06*
(5.55)-
-0.25(-1.64)
0.00(0.17)-0.05
(-0.03)-
-
-
0.99*
(5.34)-0.07
(-0.57)-0.00
(-0.12)-
0.011(1.03)0.004(0.87)
-
0.06*
(5.38)-
0.52*
(37.7)-0.00
(-0.21)5.62*
(2.70)1.22*
(2.25)1.35*
(2.66)0.42
(1.04)-
-
-
-
-
-
-
-
-
0.26*
(2.08)-
-
-
-
-
-
-
-
-
-
-
-0.03*
(-2.50)-
-
0.54*
(37.6)-
-
-
-
-
-
-
-
-
-
-
-
-
0.02*
(2.54)
0.60*
(30.4)-
-
-
-
-
1.13*
(5.26)-0.11
(-0.91)-0.00
(-0.07)-0.003(-0.95)
-
-
-
-
-
-0.30(-1.59)-0.00
(-0.13)-0.38
(-0.19)-
0.86**
(1.74)-
1.10*
(5.18)-0.08
(-0.66)-0.00
(-0.31)-0.005(-1.36)0.54*
(6.48)0.07*
(2.12)-
0.05*
(4.07)-
0.40*
(23.7)0.00
(1.14)-2.26
(-0.41)-
-
-
-
-
-
-
-
-
-
-
-
0.54*
(19.5)-
-
-
-
-
0.42(0.93)1.12
(0.93)-0.00**
(-1.83)-
-
-
-
-
-
1.61*
(7.09)-
-
-
-
-
-
-
-
-
-
-
-0.08*
(-5.33)-
-
-0.6*
(-2.09)-
-
-
-
-
-
-
-
-
-
-
-
0.08*
(3.99)-
-0.61*
(-2.14)0.00
(0.42)-11.9**
(-1.80)-
-
-
0.31(0.83)1.43
(1.20)-0.00**
(-1.75)-
0.015(0.32)0.003(0.66)
-
0.08*
(4.06)-
R2
NFp-value
0.32,3415.270.00
1.42,29210.090.00
0.82,34122.410.00
1.62,29230.780.00
2.82,2927.730.00
0.91,4314.120.00
0.31,4256.440.00
0.31,4316.440.01
1.91,4257.210.00
6.11,4259.420.00
0.009110.740.48
0.48671.710.16
2.9909
28.410.00
2.6867
15.890.00
3.08673.140.00
