The Determinants of the Leasing Decision of Small and Large Companies

We analyse the leasing decision of more than 3000 UK quoted and unquoted companies over the sample period 1982–1996. We show that, for the sample as a whole, companies that use leasing are more likely to have tax losses, high fixed capital investment, high debt-to-equity ratio and to be larger than companies that do not use leasing. We show, however, that the determinants of leasing are not homogeneous across firms of different size. For large companies, leasing, profitability, leverage and taxation are positively correlated. In contrast, for small companies, the leasing decision is not driven by taxation or by profitability, but by growth opportunities. We show that small firms with high Tobin's q and those that are less profitable are more likely to use leasing.