Product Market Threats and Leases

Abstract

We document that product market threats increase the use of leased capital. We use Chinese import penetration in an instrumental variables setting to address endogeneity concerns. The positive relation between product market threats and leases is larger for firms that are financially constrained, need financial flexibility, and most impacted by predation risk. In additional analyses, we find that the increased use of leases corresponds to a diminished effect of product market threats on investment, growth, and profitability. Collectively, the findings identify product market threats as a non-tax rate factor that increases the strategic use of leased capital.