Evidence of Motives and Market Reactions to Sale and Leasebacks

Abstract

In this paper I find systematic differences between firms using sale-and-leaseback transactions in comparison to industry averages. I find evidence supporting the primary theoretical reason for leasing, namely taxes and mixed support for asymmetric information costs and bankruptcy costs relating to leasing. Contrary to theory, I find that these firms are typically large and solvent with high growth potential but have low interest coverage and high leverage suggesting that the need for cash in tandem with capital constraints are driving these transactions. Controlling for credit constraints, I find abnormal market returns are positively correlated with P/E and negatively correlated with debt structure suggesting that the market perceives sale-and-leaseback funds likely to be used for growth as value enhancing while firms likely to use funds to meet debt obligation experience lower event returns.