Lease Characteristics, Agency Costs, and Tax Considerations

Abstract

We examine the determinants that influence managers’ decision as to whether a lease is structured as a financing lease or an operating lease. Specifically, we find that firms with higher marginal tax rates, lower credit ratings, and more severe agency problems are more likely to use both operating leases and financing leases. However, tax considerations and debt capacity have little effect on which of the two types of lease is chosen. More importantly, we find that differences in kinds of agency problemsare reflected in the choice of the type of lease. Our study provides a better understanding of the extent of risks and benefits associated with the use of leased assetsand contributes to the discussion of impending revisions to lease accounting rules by standard-setting bodies.