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Operating leases and the assessment of lease-debt substitutability

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<mark>Journal publication date</mark>03/2000
<mark>Journal</mark>Journal of Banking and Finance
Issue number3
Volume24
Number of pages44
Pages (from-to)427-470
Publication StatusPublished
<mark>Original language</mark>English

Abstract

Operating leases are estimated in the current paper to be approximately thirteen times larger than finance leases, on average. In recognition of this, the paper investigates the degree of substitutability between leasing and non-lease debt using a comprehensive measure of leasing, improving on the partial measures used in prior research. Operating lease liabilities are estimated using the ‘constructive capitalisation’ approach suggested by Imhoff, Lipe and Wright (1991, Accounting Horizons 5, pp. 51–63), modified to incorporate company-specific and UK-relevant assumptions. The results imply that leasing and debt are partial substitutes, with £1 of leasing displacing approximately £0.23 of non-lease debt, on average, consistent with the argument that lessors bear some risks which are not inherent in debt contracts. These findings suggest that substitution effects are not uniform across lease types.