How Does Information Asymmetry Affect Lease-or-Buy Decisions? Evidence from US Listed Companies in Air Transportation Industry

Abstract

Research objectives

Firms can either lease or buy assets. This study examines the relationship between information asymmetry and leasing. It investigates the determinants behind firms’ decisions to lease or acquire an asset using information asymmetry framework to see if it has additional explanatory power.

Current accounting standards classify leases to capital and operating leases allowing firms to have significant off-balance sheet liabilities and assets by taking advantage of the accounting treatment of operating leases. Off-balance sheet operating lease commitments potentially distort interpretation of firm-specific metrics for risk, performance and return by ignoring significant amount of debt that remain outside the formal recognition in the financial statements.

Prior studies have connected the traditional economic benefits, accounting quality and financial constraints to the propensity to lease. Extending the previous findings, the empirical analysis in this study investigates the association between operating leases and information asymmetry.

The current leasing standards are undergoing a major restructuring as the IASB published its new standard, IFRS 16 Leases, in January 2016. It will have a fundamental impact on lease accounting and thus this study reflects the possible consequences of the standard, which has an effective date in January 2019.

Data and methodology

Data used in this study is obtained from Compustat database. The study focuses on air transport industry since it is very lease intensive business. The data consists of 744 observations from years 1995-2016. A subsample of 108 observations used to study the association with another proxy for information asymmetry.

Empirical part of this study is conducted using quantitative regression analysis. Information asymmetry is examined by using two proxy variables as well as two different proxies for lease propensity. The effect of asymmetric information is examined studying the relationship between the lease proxy and the information asymmetry proxy using two different models.

Findings

The study does not succeed in finding evidence supporting the main hypothesis that information asymmetry is associated with off-balance sheet leasing. The results imply that information asymmetry does not have incremental explanatory power explaining off-balance sheet leases.