Post by Laurel Franzen on Oct 7, 2010 7:29:55 GMT 4
Manipulating the Balance Sheet? Implications of Off-Balance-Sheet Lease Financing
Laurel Franzen
Loyola Marymount University
Kimberly J. Rodgers
American University - Kogod School of Business
Timothy T. Simin
Pennsylvania State University
September 20, 2010
Abstract:
We document a remarkable increase in off-balance-sheet (OBS) lease financing. Consistent with regulators’ contention that corporations intentionally distort their balance sheets, we find that theoretical determinants do not explain this trend. Our results have measurable implications for corporate capital structure, common risk and performance metrics, and equity returns. An increase in excess OBS financing suggests a decrease in conventional debt. However, the magnitude of the growth in OBS obligations suggests a significant increase in financial risk over time. Conventional leverage, O- and Z-Score, and return on capital underestimate risk (and overstate performance) of firms utilizing OBS leasing when compared to firms with conventional debt financing. Firms utilizing the greatest excess OBS lease financing exhibit significant excess equity returns.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1680077_code300559.pdf?abstractid=1680077&mirid=2
Laurel Franzen
Loyola Marymount University
Kimberly J. Rodgers
American University - Kogod School of Business
Timothy T. Simin
Pennsylvania State University
September 20, 2010
Abstract:
We document a remarkable increase in off-balance-sheet (OBS) lease financing. Consistent with regulators’ contention that corporations intentionally distort their balance sheets, we find that theoretical determinants do not explain this trend. Our results have measurable implications for corporate capital structure, common risk and performance metrics, and equity returns. An increase in excess OBS financing suggests a decrease in conventional debt. However, the magnitude of the growth in OBS obligations suggests a significant increase in financial risk over time. Conventional leverage, O- and Z-Score, and return on capital underestimate risk (and overstate performance) of firms utilizing OBS leasing when compared to firms with conventional debt financing. Firms utilizing the greatest excess OBS lease financing exhibit significant excess equity returns.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1680077_code300559.pdf?abstractid=1680077&mirid=2