Leases and Debt: Complements or Substitutes? Evidence from Belgian SMEs

10 Pages Posted: 28 Aug 2007

See all articles by Marc Deloof

Marc Deloof

University of Antwerp; University of Antwerp - Antwerp Management School

Istvan Lagaert

University of Antwerp - UFSIA

Ilse Verschueren

Vrije Universiteit Brussel (VUB)

Abstract

This study investigates the lease-debt relationship for Belgian small and medium-sized enterprises (SMEs). Traditional finance theory suggests that leases and corporate debt are substitutes: both leases and debt are fixed, contractual obligations that reduce the firm's debt capacity. More use of leases should therefore be associated with less non-lease debt financing. However, some empirical studies find that for large firms, leases and debt are complements. A theoretical explanation for this so-called leasing puzzle is based on the tax advantage of leasing over debt. However, in Belgium, tax differences between lessor and lessee do not affect the choice between leases and debt, because the lessee is considered to be the fiscal owner of the assets. He may write off these assets for tax purposes, and the interest part of the lease payments are deductible from his taxable income. Leases and debt can therefore be expected to be substitutes. This hypothesis is tested for a sample of 5,595 firm-year observations for 1,119 Belgian non-financial SMEs in the 1995-1999 period. The results indeed provide strong support for the substitution hypothesis: more debt is associated with less leases.

Suggested Citation

Deloof, Marc and Lagaert, Istvan and Verschueren, Ilse, Leases and Debt: Complements or Substitutes? Evidence from Belgian SMEs. Journal of Small Business Management, Vol. 45, No. 4, pp. 491-500, October 2007, Available at SSRN: https://ssrn.com/abstract=1008090 or http://dx.doi.org/10.1111/j.1540-627X.2007.00224.x

Marc Deloof (Contact Author)

University of Antwerp ( email )

Prinsstraat 13
Faculteit TEW
Antwerpen, 2000
Belgium
+32 3 265 41 69 (Phone)
+32 3 265 47 99 (Fax)

HOME PAGE: http://https://www.uantwerpen.be/en/staff/marc-deloof/

University of Antwerp - Antwerp Management School ( email )

Boogkeers 5
Antwerp, 2000
Belgium

Istvan Lagaert

University of Antwerp - UFSIA ( email )

Prinsstraat 13
Antwerpen, Antwerp B-2000
Belgium

Ilse Verschueren

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium
+32-2-629 21 93 (Phone)
+32 2-629 20 60 (Fax)

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