Work

Does climate policy uncertainty affect a firm's lease versus buy decision? Evidence from the US

Year: 2025

Type: article

Abstract: We examine whether US firms prefer to use operating leases to purchase assets when faced with elevated climate policy uncertainty (CPU). Using a sample of 83,666 firm-year observations from 2000 to 2017, we find that CPU exhibits a significant positive relationship with operating lease intensity. The findings are robust to alternative lease and CPU proxies and alternative model specifications. Additionally, we find that financially constrained and environmentally exposed firms are more likely to increase their operating lease intensity during periods of tighter CPU. Consistent with the hedging property of leasing described by Smith (1979), leasing allows firms to form an ideal hedge against asset ownership when exposed to heightened risks induced by CPU. The findings are also consistent with financial contracting motivation (Smith and Wakeman, 1985), suggesting that firms faced with greater CPU depend on leasing to avoid the higher cost of debt financing.

Source: International Review of Economics & Finance

DOI: 10.1016/j.iref.2025.104647

Authors: Fahim Sultanbawa, Hasibul Chowdhury, Ihtisham Malik, Anamul Haque

Institutions: The University of Queensland, Ajman University, University of Chittagong

Language: English

Topic: Corporate Finance and Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDG: Climate action

Open Access status: gold

Estimated APC paid: $1,930