Evidence of Motives and Market Reactions to Sale and Leasebacks

A sale and leaseback is an alternative to traditional financing in which the owner of an asset contracts to sell the asset and then to lease it from the buyer. This paper focuses on some of the motivations behind this decision. We find evidence supporting the primary theoretical reason for leasing, namely taxes. We also find evidence supporting liquidity needs and capital constraints as motivators. Results are mixed for financial distress and there is little support for asymmetric information motivations. We find that sale-and-leaseback (SLB) firms are typically large and solvent, which contradicts prior theory. Our results suggest that a firms liquidity needs in conjunction with a lower marginal tax rate and possible credit constraints drive the decision to initiate a sale-and-leaseback. Additionally, we find abnormal market returns are positively correlated with the price-earning (P/E) ratio and negatively correlated with debt structure, suggesting that the market reacts more favorably to a sale-and-leaseback announcement when the capital is likely to be used to fund growth as opposed to cover debt obligations