Title:
CAPITAL MARKET FRICTIONS, LEASING AND CAPITAL STRUCTURE

Authors:
Vasantha Rao Chigurupati, USA

Abstract:

The question of how do corporations finance their operations is one of the central tenets of corporate finance. The extant literature on capital structure tests so far excludes operating leases from the analysis. 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 even after controlling for other conventional variables, identified by Rajan and Zingales(1995), that are found to explain capital structure.  This result is robust to alternative ways of measuring variables and different estimation techniques. 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. I find that the substitution relation between debt and leases is robust even after correcting for endogeneity.