Are Leases and Debt Substitutes? Evidence from Belgian Firms

Marc Deloof · Ilse Verschueren

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Corporate Finance and Governance Financial Analysis and Corporate Governance Working Capital and Financial Performance

Abstract

Finance theory suggests that leases and corporate debt are substitutes. However, empirical evidence is mixed. The contribution of the present paper is to test the substitution hypothesis for a sample of 1,066 large Belgian non-financial firms for the 1992-1994 period, considering different debt categories, including intra-group loans. Belgium provides an interesting case to investigate the leasing decision because tax differences between lessor and lessee do not matter. We find that long term bank debt and intra-group debt are substitutes for lease financing. However, we do not find a one-to-one relationship, which indicates that leases and long-term debt are not perfect substitutes.

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