A list of the prominent value enhancements in leasing includes the conservation of working capital, preservation of lines of credit, net tax advantages, transfer of risk of equipment obsolescence, off-balance sheet accounting treatment, debt covenant compliance, and unique structuring such as service contract and bundling arrangements. The purpose of this article is to summarize the published "scientific" or academic evidence that examines these leasing attributes with empirical data. The academic evidence supports the value proposition that leasing preserves capital and lines of credit, provides tax advantages, and may offer advantages from the transfer of equipment residual risk. In published studies to date, the ubiquitous off-balance sheet advantage to leasing has not been shown to enhance firm value. Further research is needed in this area.
Evidence for the Leasing Value Proposition By James Schallheim, PhD W 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 1 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- EVIDENCE FOR THE LEASING VALUE PROPOSITION JOURNAL OF EQUIPMENT LEASE FINANCING • Fall 2009 • VOL. 27/NO. 3 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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