Leasing and the Allocation Efficiency of Finance

This paper argues that leasing, as an important but often ignored source of external financing, facilitates the allocation efficiency of finance. We document a large overestimation of measured finance misallocation (Whited and Zhao, 2021) when lease-induced debt is ignored among US manufacturing firms. Appropriately accounting for leases on the liability side translates into a 5.5% real value-added gain. In the time-series, this lease-adjustment generated gain exhibits a strong countercyclical pattern. In the cross-section, we find such gain presents asymmetric patterns for firms with different size – it is more salient within small firms (nearly 20%) than in large firms (1%). Leasing improves the allocation of finance by raising the total amount of finance as well as by alleviating inefficient debt-equity combinations across firms. Finally, we find that factoring in lease-induced debt lowers both the level and dispersion of finance costs, consistent with the mitigation effect of lease-adjustment on finance allocation efficiency