Essays On Capital Market Frictions: Evidence From Lease Financing

Date of Completion

January 2012


Economics, Finance




I study the effect of leasing, as a way of alleviating the adverse impact of information and agency frictions, on corporation's investment, financing and risk management activities. In the first essay, consistent with theory, I find that lessee firms with higher information asymmetry rely on more lease financing. Using credit ratings and underinvestment as measures of agency costs between bondholders and shareholders, I find that leasing is positively correlated with agency costs. I find that leasing positively enables capital expenditures and reduces the sensitivity of investment expenditures to availability of internal funds in sample firms. I also find that lessee firms experience positive abnormal stock returns even after controlling for appropriate risk factors and firm characteristics such as size and equity book-to-market ratio. ^ In the second essay, using operating lease adjusted debt ratio and market microstructure based measures for information asymmetry, I find that information asymmetry proxied by either illiquidity or bid-ask spread is positively and significantly related to the operating lease adjusted debt ratio. Further, I comprehensively reexamine the debt-lease substitute vs. complement relation across several dimensions viz. credit ratings, information asymmetry, debt capacity, R&D, dividends and financial deficit and consistently find a substitute relation between debt and leases in the sample firms. ^ In the third essay, I offer the first empirical evidence on hedging puzzle which is the trade-off between leasing and hedging for financially constrained firms. Using a sample of 218 non-financial firms drawn from S&P 100, S&P 400 and S&P 600 indices for the period of 2006-2010, 1 find that firms that lease more of their property, plant and equipment use less financial derivatives, consistent with the predictions of Rampini and Viswanathan (2010). Further, using broad market microstructure based measures of information asymmetry, I find that firms with higher information asymmetry hedge more. The main results in all the essays are robust to several alternative measurements of the key variables and different regression specifications, estimation techniques and corrections for endogeneity of leasing. ^