Leasing provides a significant source of finance across UK firms. Historically, itsuse has been attributed to favourable tax treatment and 'off-balance sheet'accounting, both of which have been eroded over time. The present daydeterminants of leasing have received limited investigation, and prior research hasfocused on the use of finance leases in isolation from overall corporate financingdecisions. This seems inappropriate given the predominant and prolific use ofoperating leases (Beattie, Edwards and Goodacre, 1998), and evidence to suggestthat lease and debt finance appear to be at least partial substitutes (Beattie,Goodacre and Thomson, 2000). Further, proposals issued by the AccountingStandards Board in late 1999 look set to essentially remove the current 'off-balancesheet' accounting treatment of operating leases. If accounting treatment is in anyway responsible for the current use of operating leases, these proposals are likely tohave a significant impact on the future role of leasing.In response, the present study. investigated both the current role of leasing in thewider context of corporate financing decisions, and its future role in light of the newproposals for lease accounting. Two separate surveys of UK quoted industrialcompanies were undertaken to investigate corporate financing and leasing decisionsand views and opinions on lease accounting reform. Findings are based on aresponse of 23% (198 completed questionnaires) and 19% (91 completedquestionnaires) respectively. OLS regression analysis was also employed for asample of 159 UK quoted industrial companies, to establish the existence of an 'offbalancesheet' advantage to operating leases from a market perspective.Findings suggest that UK firms appear more likely to follow Myers' (1984)suggestion of a modified pecking order of capital structure when determining theirdebt, including leasing, levels. Investment nd dividend payout dictate the need forexternal finance, and debt including leasing is internally rather than externallyconstrained. On average, internal reserves followed by straight debt appearpreferable to leasing. However, the benefits and costs associated with all sources offinance are likely to be considered when additional finance is required. Although taxand 'off-balance sheet' advantages to leasing remain, they do not appear to dominate the leasing decision in the current climate. Avoiding large capital outlayand cash flow considerations appear of paramount importance in the decision tolease all asset types.Findings suggest that the preference for leasing over other forms of debt is notanticipated to change in response to the new proposals for lease accounting.However, the new approach may not be without consequence. Where possible,financial statement preparers are likely to take reactionary steps to minimise balancesheet obligations. At the very least, this could involve exercising any opportunity tomanipulate the new accounting treatment. It may extend to reduced investment anda decline in levels of debt financing, including leasing. Although operating leaseobligations appear to be currently taken into account in the UK market's assessmentof equity risk, the accuracy with which they are taken into account remains unclear.Therefore, the revaluation of securities in the wake of the new proposals becomingmandatory is not beyond the realms of possibility.The present study provides a holistic analysis of corporate financing and leasingdecisions in UK firms. It provides a valuable contribution to the capital structuredebate. It would seem inappropriate for future capital structure research to focus onproving alternative static trade-off and pecking order theories. Future researchwould benefit from a reconciliation of the two. The present study highlights thedifficulties in analysing corporate financing and leasing decisions, by establishingthat they are complex, multidimensional and essentially situation-specific. Thepresent study also has important implications for policy makers. In addition to thepotential economic consequences, findings appear to suggest that certain features ofthe new proposals fall short of developing into a high quality lease accountingstandard. Further consideration by policy makers from alternative perspectivesappears necessary.