Financial performance effects of synthetic leases

Abstract

This paper examines selected financial performance measures of companies using synthetic leases. First, an example is provided of some advantages of using a synthetic lease. Synthetic lease announcements are then identified for retail and manufacturing sectors from 1997–2002 through Academic LexisNexis searches, and performance measures statistically compared from pre- to post-disclosure for synthetic lease companies, relative to a control sample of companies. While observing some differences in interest coverage and profitability across samples in the year prior to lease disclosure, logistic regression results indicate that the measures do not statistically discriminate between synthetic lease and control companies. These findings suggest that the level at which companies use synthetic leases does not appear to significantly influence basic financial performance measures. Besides showing the little ‘real’ benefit of establishing such types of leases for non-economic reasons, the results suggest that capital allocation decisions should focus on the substance rather than the form of such synthetic lease transactions. Copyright © 2003 Henry Stewart Publications