Operating leases and the assessment of lease±debt substitutability

Operating leases are estimated in the current paper to be approximately thirteen times larger than ®nance leases, on average. In recognition of this, the paper investigates the degree of substitutability between leasing and non-lease debt using a comprehensive measure of leasing, improving on the partial measures used in prior research. Operating lease liabilities are estimated using the Ôconstructive capitalisationÕ approach suggested by Imho€, Lipe and Wright (1991, Accounting Horizons 5, pp. 51±63), modi®ed to incorporate company-speci®c and UK-relevant assumptions. The results imply that leasing and debt are partial substitutes, with £1 of leasing displacing approximately £0.23 of non-lease debt, on average, consistent with the argument that lessors bear some risks which are not inherent in debt contracts. These ®ndings suggest that substitution e€ects are not uniform across lease types. Ó 2000 Elsevier Science B.V. All rights reserved. JEL classi®cation: G32