The different impacts of heterogeneous lease assets on the costs of debt: a risk-sharing perspective

ABSTRACT

We examine whether the credit market participants price operating lease differently from finance lease in the perspective of risk sharing. Using a unique setting that the new lease standard is enforced in China since 2019, we find that operating (finance) lease asset shares are negatively (positively) related to lessees’ costs of debt, the risk-sharing role of operating lease assets is a mechanism of reducing COD, and this effect is more significant at firms with more financial constraints and insufficient cash flow. We fill the gap in the literature with a contribution to separate the risk-sharing effect from the accounting treatment effect in the association between two kinds of lease and costs of debt. These findings have important implications for policymakers and companies.

KEYWORDS:

• Operating lease
• finance lease
• costs of debt
• risk sharing

JEL CLASSIFICATION:

• M41
• D21
• D81
• G32

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Finance leases are required to recognize on balance sheet resulting in a higher corporate leverage (Imhoff and Thomas (1988); Park and Na 2018), in contrast, operating lease is merely disclosed in the footnotes of balance sheet.

² As is shown in Global Leasing Report 2021 issued by White Clarke Group, China is the second largest leasing market in the world with a new business stood at US$251.5bn in 2019. https://www.whiteclarkegroup.com/reports/global-leasing-report-2021

³ Prior researches, such as Sharpe and Nguyen (1995) and Eisfeldt and Rampini (2009) usually used the rental expense to calculate the operating or finance lease assets share, however, the category of lease have been cancelled under the new lease standard. So, we adopt a similarly redesigned method to measure the lease assets shares:

Additional information

Funding

This work was supported by the the Fundamental Research Funds for the Central Universities [201911127]; National Natural Science Foundation of China [award-id 20BMZ140] 2021; ”Teacher Professional Development Program” for Domestic Visiting Scholars [award-id FX2021204].