Location and lease intensity

• Published in: Journal of corporate finance (Amsterdam, Netherlands) Vol. 29; pp. 20 - 36
• Main Authors: Devos, Erik, Rahman, Shofiqur
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.12.2014; Elsevier Science Ltd
• Subjects: Agency theory; Cost analysis; Debt financing; Geographic location; Leasing; Location of industry; Operating leases; Studies; United States > US; Debt financing; Geographic location; Operating leases; G30; G32
• ISSN: 0929-1199; 1872-6313
• DOI: 10.1016/j.jcorpfin.2014.08.005

U.S. firms lease assets extensively. We find that, during 1980–2011, the average U.S. firm has a lease intensity of about 40%. Or, the average firm has present and future (up to five years) rent commitments equal to 16.6% of their total assets. We investigate whether agency costs between the lessor and the lessee affect the lease intensity of firms. To do so, we examine the impact of firms' location on the use of operating leases. The main idea of our paper is that, because obtaining information and monitoring is costly for potential lessors, especially when a lessee is relatively far away from financial centers, rural firms are less likely to use operating leases. Consistent with this hypothesis, we show that rural firms tend to have lower lease intensities than similar urban and small city firms. In addition, we find that firms with higher levels of debt capacity lease less and firms that face more financial constraint lease more. Our findings are robust to industry and lease maturity controls and consistent with the existence of an agency problem associated with leasing. •We examine the impact of firms' location on the use of operating leases.•Information acquisition and monitoring costs are likely higher for rural lessees.•Rural firms have lower lease intensities than similar urban and small city firms.•Our results suggest the existence of an agency problem associated with leasing.