The Significance of Tax as a Determinant of Leasing: Evidence from UK Tax changes

Abstract

This paper analyses the significance of corporation tax as one of the factors that influences leasing activities. I use the UK data and employ the Tobit model to test the debatable substitutional relationship between leasing and debt financing. The study also investigates whether there is any industrial influence on the relationship between lease rate and debt ratio. It finally tests the significance of tax as a factor influencing leasing and whether that significance varies across the sectors. The results show that in absence of dummy variable that capture the influence of industry to which the company belongs, debt ratio, size, liquidity and growth variables significantly influence the lease rate and also that lease and debt are substitutes. However, the extent to which debt and lease are substitute varies across the sectors implying that the nature of assets used in the production process has some influence on the leasing activities. The results show further that tax is an important factor influencing the leasing activities and its influence is significant irrespective of the sector to which the company belongs. In general the results suggest that any effort to promote leasing activities should focus on the tax incentives and the availability of debt financing as alternative to leasing.