Are leases and debt substitutes? Evidence from Belgian firms

Finance theory suggests that leases and corporate debt are substitutes. How ever, empirical evidence is mixed. The contribution of the present paper is to test the substitution hypothesis for a sample of 1,066 large Belgian no n-financial firms for the 1992-1994 period, considering different debt cate gories, including intra-group loans. Belgium provides an interesting case t o investigate the leasing decision because tax differences between lessor a nd lessee do not matter. We find that long term bank debt and intra-group d ebt are substitutes for lease financing. However, we do not find a one-to-o ne relationship, which indicates that leases and long-term debt are not per fect substitutes.