Essays on Leasing

Abstract

The aim of this thesis is to investigate the role of operating leases, off-balance sheet lease agreements, in the context of corporate financing, major investment decisions, and debt contracting agreements. This research is particularly timely given that a new leasing accounting standard took effect in 2019 significantly changing the accounting rules for operating leases. Under this new leasing accounting rule (IFRS 16 leases), all assets and liabilities arising from operating-lease agreements must be brought back into the balance sheet and no longer allowing the off-balance sheet treatment of operating leases. Our first analysis revisits the use of off-balance sheet leasing by UK firms. We present robust evidence that supports the existence of an “off-balance sheet” incentive to operating-lease financing from a firm’s perspective. We show that the dependency of UK firms on off-balance sheet lease financing has become more pronounced between the years 2000 and 2016. This study also finds that firms with a higher probability of insolvency are more likely to use off-balance sheet leasing to access additional funds without compromising their level of reported debt. Building on our first findings, our subsequent analysis focuses on the role of off-balance sheet leasing in explaining the failure of one major type of firm investment decision, (i.e. the decision to Merge or Acquire other firms (M&A)). We hypothesise and find that the likelihood that an M&A deal is terminated, after the announcement date, increases significantly if a firm seeks to acquire a target with a high level of off-balance sheet leasing. This relationship is highly significant in the period prior to the 2008 Global Financial Crisis (GFC). Thus, we support the view that off-balance sheet lease financing increases opacity and decreases the trustworthiness of firms’ reported accounting information. Finally, our last analysis finds that in the context of private loan contracts, firms use significantly more off-balance sheet leasing when approaching debt covenant violations. We also find that these firms are particularly highly leveraged and low performing. In a nutshell, this thesis presents significant support for the view of operating leases as a strategic corporate financing tool, allowing companies to access additional funds without compromising their level of reported Debt to Equity ratio. This thesis also provides strong evidence that supports the accounting standard setters’ ambition that the implementation of the new IFRS 16 leases rules will result in better accounting transparency to all market participants and financial statement users.

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Identifiers

ORCID for Fatma Bneijara: orcid.org/0000-0003-4319-3888

ORCID for Simon Wolfe: orcid.org/0000-0001-9815-9535

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