Operating leases and the assessment of lease-debt substitutability

Operating leases are estimated in the current paper to be approximately thi rteen times larger than finance 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 p artial measures used in prior research. Operating lease liabilities are est imated using the 'constructive capitalisation' approach suggested by Imhoff , Lipe and Wright (1991, Accounting Horizons 5, pp. 51-63), modified to inc orporate company-specific and UK-relevant assumptions. The results imply th at leasing and debt are partial substitutes, with fl of leasing displacing approximately pound 0.23 of non-lease debt, on average, consistent with the argument that lessors bear some risks which are not inherent in debt contr acts. These findings suggest that substitution effects are not uniform acro ss lease types. (C) 2000 Elsevier Science B.V. All rights reserved.