Evidence for the Leasing Value Proposition by ProQuest


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									   Evidence for the Leasing
      Value Proposition
                                           By James Schallheim, PhD

                      hen leasing professionals offer the        additional academic research is needed and could sup-
                      leasing option to their clients, they      port potential value propositions for leasing.
                      attempt to sell the value of leasing. A
                      list of the prominent value enhance-       CONSERVATION OF CAPITAL AND
ments in leasing includes the conservation of working            LINES OF CREDIT
capital, preservation of lines of credit,                                           Until recently, 100% debt financing,
net tax advantages, transfer of risk of               Academic research             conservation of capital, preservation
equipment obsolescence, off-balance                                                 of credit lines, and free working capi-
sheet accounting treatment, debt cov-               supports the notion             tal were deemed by many academics
enant compliance, and unique struc-                                                 as dubious reasons for leasing. How-
turing such as service contract and               that leasing preserves            ever, recent research by Eisfeldt and
bundling arrangements. The purpose                                                  Rampini (2009) offers a compelling
of this article is to summarize the pub-
                                                capital and lines of credit, reason why this value proposition for
lished “scientific” or academic evidence                                            leasing is valid. Leasing is valuable to
                                                 provides tax advantages            lessee firms that have a difficult time
that examines these leasing attributes
with empirical data. The article will                                               obtaining financing elsewhere.
                                                and may offer advantages
point out the value propositions that                                                    Eisfeldt and Rampini develop a
are supported by the evidence, but also                                             leasing model that trades off a bank-
                                                     from the transfer of
will identify others where the evidence                                             ruptcy cost (repossession) advantage
is lacking or where additional research          equipment residual risk            to lessors against an agency cost disad-
is needed.                                                                          vantage. The bankruptcy cost advan-
     In summary, the academic evi-               to the lessor. Less clear,         tage comes about because true leases
dence supports the value proposition                                                can have higher priority in bankruptcy
that leasing preserves capital and lines        however, is whether there than even secured debt. Furthermore,
of credit, provides tax advantages, and                                             the ownership position of the lessor
may offer advantages from the transfer             is any support for off-          may offer a repossession advantage
of equipment residual risk. In pub-                                                 even outside bankruptcy.
                                               balance sheet financing as                 There is also an advantage to the
lished studies to date, the ubiquitous
off-balance sheet advantage to leasing                                              lessor in the finance lease as contained
                                                 a value enhancement to
has not been shown to enhance firm                                                  in Article 2A of the Uniform Commer-
value. Further research is needed in this                                           cial Code. One of the provisions of the
                                                         lessee firms.
area. Other areas are pointed out where                                             UCC for the finance lease is the so-

called hell-or-high-water clause, which provides strong          metry (meaning that they are at an information disad-
protection to the lessor as provider of funding even if the      vantage) are much more likely to employ lease financing.
equipment fails to perform for any reason. The agency            Several academic studies find very strong support for
cost disadvantage to leasing refers to th
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