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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 nonfinancial SMEs in the 1995–1999 period. The results indeed provide strong support for the substitution hypothesis: more debt is associated with less leases.
Notes
1 See Durinck et al. Citation(1990) for a comparison of the impact of taxation on leases in Belgium and the United States.
2 Affiliated firms of a firm are (1) the firms that control the firm, (2) the firms that are controlled by the firm, (3) the firms that form a consortium with the firm, and (4) the firms that, to the knowledge of management, are controlled by the firms referred to in (1), (2), and (3).
3 The NACE industrial classification serves the same purpose as the well‐known Standard Industrial Classification (SIC) classification and has been established for industry taxonomy within the European Union. For details, see Eurostat Citation(1985).
Additional information
Notes on contributors
Marc Deloof
Marc Deloof is associate professor of finance at the University of Antwerp.
Istvan Lagaert
Istvan Lagaert was research assistant at the University of Antwerp when the research for this paper was conducted.
Ilse Verschueren
Ilse Verschueren was postdoctoral fellow at the Vrije Universiteit Brussel when the research for this paper was conducted.