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Journal of Economics and Finance

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04-12-2017

Leasing, legal environments, and growth: evidence from 76 countries

Author: Na Zhang

Published in: Journal of Economics and Finance | Issue 4/2018

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Abstract

Leasing is one of the most important sources of external financing for corporate firms. This paper uses data from 76 countries to examine how legal environments affect firms’ leasing behavior. The results suggest that leasing is used less in countries with weak legal environments: Firms in countries with weak legal environments tend to avoid leasing contracts, because the contracts are costly to enforce. I also find that leasing has a measurable impact on both firm growth and GDP growth. Leasing can increase the availability of capital, improve operational efficiency and, as a result, potentially contribute to growth. The results provide a policy implication, by which possible adjustments in a legal system can facilitate the availability of leasing, which may in turn generate real economic gains.

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Eisfeldt and Rampini (2009) find that the smallest decile firms in the U.S. census data lease 46% of their capital, and Zhang (2012) finds that the average publicly traded firm in the U.S. leases more than 37% of its capital.

A lease is treated as capital lease if it meets any of the following four conditions: (1) if the lease life exceeds 75% of the life of the asset; (2) if the lease transfers ownership of the asset to the lessee at the end of the lease term; (3) if the lease contains a bargain purchase option; or (4) if the present discounted value of the required lease payments exceeds 90% of the fair market value of the asset. Otherwise, it is an operating lease. A capital lease is reported as the corresponding debt obligation on the balance sheet. In contrast, an operating lease represents off-balance-sheet financing for the lessee, and is reflected on the income statement as rent expense.

Boot and Thakor (2000) suggest that higher competition from the capital market will reduce total bank lending. In general, countries with weak legal systems tend to have less competition in their capital markets.

Detailed information about the 76 countries is shown in the appendix.

According to the SIC definition, this major group includes firms that are primarily engaged in furnishing automotive repair, rental, leasing, and parking services to the public. Firms doing business in financing the leasing of passenger cars and trucks are also classified in this group.

Eisfeldt and Rampini (2009) use the same measure, but their information on rental expenses comes from Census data.

Descriptive statistics for each country are given in the Appendix.

This result—that leasing is associated with the increase in the quality of legal environments— is not contrary to the conclusion of Zhang (2012). Zhang only considers the lessee side and find that firms that are more constrained lease more capital. However, different countries have different leasing markets and different lessors. Lessors decide how much capital they would provide to the market. In developing countries and countries with weak legal environments, lessors are hesitant to provide capital. They want to avoid possible contractual disputes, and are worried about the repossessing process. Thus, leasing is less popular in developing countries and countries with weak legal environments.

Their results regarding legal rights are insignificant.

I am interested in the effects of legal environments on firms’ leasing behavior. Legal environments are the same for every firm in the same country. Firm fixed effects include country fixed effects. Thus, I don’t control for firm fixed effects in these regressions, but instead control for industry fixed effects.

Many firms have missing data on firm specific variables. Thus, sample size shrinks to less than 15,000 observations.

I control for past growth rates and firm fixed effects to reduce the effect of reverse causality.

Many growth models in the literature are based on differentiation.

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Title: Leasing, legal environments, and growth: evidence from 76 countries
Author: Na Zhang
Publication date: 04-12-2017
Publisher: Springer US
Published in: Journal of Economics and Finance / Issue 4/2018
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-017-9419-5

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