Why Firms Lease Short-Lived Assets: A Tax-Based Explanation

The authors examine the impact of assets’ useful lives on firms’ leasing decisions in Canada. Their theoretical analysis demonstrates that firms are more likely to lease assets with shorter useful lives. More specifically, they show that in a competitive financing market, lease payments are a decreasing function of lessors’ tax rates. Therefore, the useful life of an asset is relevant in leasing decisions because lessors’ tax rates are less likely to remain at the highest level over a longer horizon, leading to higher leasing costs and less leasing activity. Using a sample of publicly traded Canadian companies, the authors also provide empirical evidence that the useful life of an asset is negatively associated with the proportion of assets leased by a firm.