Lease vs buy: clarifying the impact of tax and borrowing rates
ISSN: 0307-4358
Article publication date: 16 May 2019
Issue publication date: 16 May 2019
Abstract
Purpose
The purpose of this paper is to survey the lease vs buy coverage in leading managerial finance textbooks and to clarify the impact of tax rates and borrowing rates.
Design/methodology/approach
The survey uses “plain vanilla” lease vs buy scenarios to critique and clarify particular issues in the textbook presentations.
Findings
The survey finds: a lone text shows that there can be a gain from leasing if the lessee’s tax rate is higher than the lessor’s, which challenges the “conventional wisdom” maintained in all the other texts; some textbook examples attribute an overall benefit to leasing to the tax rate difference, but the benefit is actually due to a borrowing rate difference, and borrowing rate differences may be a more important source of leasing benefits than tax rate differences.
Originality/value
The survey provides insights that are not well known and should be useful to instructors and practitioners.
Keywords
Acknowledgements
The authors are grateful to Doug Emery, Atul Gupta, Don Johnson, Ben Nunnally, Ralph Oliva, David Rakowski, Richard Sansing, Sara Shirley, Jeff Stark and two anonymous reviewers, for their helpful inputs on this and previous drafts.
Citation
Musumeci, J. and O’Brien, T. (2019), "Lease vs buy: clarifying the impact of tax and borrowing rates", Managerial Finance, Vol. 45 No. 5, pp. 686-696. https://doi.org/10.1108/MF-09-2018-0448
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited