Financial Leasing under Inflation

Abstract

* In last decade, there has been a relatively rapid growth in leasing as a method of financing. Anderson [1] estimated that during period ending in 1980, approximately twenty percent of new acquisitions of capital goods in U.S. were financed by leases. Lewellen, Long, and McConnell [13] have demonstrated that in a perfect market competitive market equilibrium lease payments will be determined such that the lease or buy choice will be a matter of indifference (p. 790). They conclude that there may exist market imperfections such as tax rate differentials between lessors and lessees, differences in realizable depreciation deductions and salvage values, and different borrowing possibilities, which may lead to exploitable opportunities by lessors and lessees. While these and many other factors may contribute to a cost difference between leasing and purchasing an asset, income tax differentials among firms were emphasized by Myers, Dill and Bautista (MDB) [15] as major market imperfection stipulating lease financing. Miller and Upton [14] suggested that other tax asymmetries, such as inability of some firms to exploit investment tax subsidies, are important in explaining existence of leasing. However, in light of recent growth in leasing industry, it seems that there may be other factors that accentuate tax-related effects and further