Determinants of Financial Leasing in Jordan
Determinants of Financial Leasing in Jordan
Shamsi Bawaneh1, Mohammad Al-Shiab2’*
Accounting Department, Mu'tah University, Jordan
2
Finance & Banking Department, Mu'tah University, Jordan
1
‫ملخص الدراسة‬
‫تهدف الدراسة لتحديد ابرز العوامل المؤثرة في استخدام التأجير التمويلي كمصدر من مصادر التمويل والمتمثلة‬
‫) الختبار‬OLS( ‫ والعامل التسويقي حيث تم استخدام نموذج ال‬،‫ عامل التشريعات‬،‫بالعامل الضريبي والمحاسبي‬
‫ استابانة على عينة من الشركات‬150 ‫ تم توزيع‬.‫ تعتمد الدراسة في جمع البيانات على االستبانة‬.‫فرضيات الدراسة‬
‫ حيث وكانت االستبانات المسترجعة تشكل ما نسبتة‬،‫الصناع ية المدرجة في سوق عمان المالي تم اختيارها عشوائيا‬
‫ تم استخدام االختبارات االحصائية المناسبة للتأكد من أهلية النموذج الختبار الفرضيات وفيما اذا كانت البيانات‬.%65
‫تحقق افتراضات النموذج المستخدم ليتسنى الحصول على نتائج ذات مصداقية كالتأكد من ان البيانات تتوزع توزيعا‬
‫ مدى ثبات ومصداقية االستبانة قي قياس متغيرات الدراسة وغيرها‬،‫ خلو البيانات من ظاهرة االرتباط الذاتي‬،‫طبيعيا‬
‫ دلت نتائج الدراسة على وجود اثر لجميع متغيرات الدراسة المستقلة على المتغير التابع‬.‫من االختبارات ذات العالقة‬
‫ وعلية يوصي الباحثان بضرورة االهتمام بالعوامل السابقة على اعتبار انها ذات تاثير ذو‬.)‫(استخدام التأجير التميلي‬
.‫داللة احصائية وذلك كمحاولة لنشر فكرة استخدام التاجير التمويلي بشكل اوسع‬
‫ التشريعات‬،‫ الضريبة‬،‫ التأجير التمويلي‬:‫الكلمات الدالة‬
Abstract
This study examines the impact of different variables on the use of financial leasing,
namely; tax and accounting issues, legislations, and marketing by adopting the OLS
model for testing the study hypothesis. The study relies on collecting the data by using the
questionnaire approach developed by the researchers. Overall, 150 questionnaires were
distributed on randomly selected industrial companies listed on Amman Stock Exchange
(ASE). The questionnaires returned back were 65%. Selected statistical tests were used to
check whether the data meets the model assumptions, such as normality, autocorrolation,
multicollinearity tests. In addition, Cronbach Alpha test was applied to check the
suitability and credibility of the questionnaire.The study results show that all explanatory
variables had positive influence on the dependent variable (i.e. the use of financial
leasing). However, the only variable had significant influence was the tax and accounting
variable, where other variables influences were not significant. Therefore, the
researchers recommend to pay more attention on such variables, more specifically the
tax and accounting privileges in using the financial leasing.
Key words: Financial Leasing; Tax, Legislations
1. Introduction
Firms generally own fixed assets and report them on their balance sheets, but it is the use
of building and equipment that is important, not their ownership per se. One way of
obtaining the use of facilities and equipment is to buy them, but an alternative is to lease
them. Leasing has grown tremendously in popularity and today is the fastest growing
form of capital investment. The popularity of leasing is evidenced in the fact that 546 of
600 companies surveyed by the AICPA in 1996 disclosed lease data (Myers 1964). Prior
to the 1950s in the USA, leasing was generally associated with real estate-land and
buildings (Brigham and Gapenski 1985). Today, however, it is possible to lease virtually

Corresponding authors. Tel. +962-79-6959-350; +962-3-2360014
E-mail address: mohammad_alshiab@yahoo.com
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Determinants of Financial Leasing in Jordan
any kind of fixed asset. In 1984 about 20 percent of all new capital equipment acquired
by businesses in the USA was financed through lease arrangements. Since then, leasing is
most popular method of financing not only in the USA, but also globally (LFG 1996). It
is estimated that leasing, in the late 90s, provides about one-eighth of the world’s
equipment financing requirements (Kieso and Weygandt 1998). In 2004, financial leasing
was the fastest growing way of financing fixed assets all over the world. It was raised by
26% counting around 580 billion dollars. The USA part count $241 billions taking over
the funds provided through the USA banks credit, bonds and equity. In addition, in the
USA it shows that fixed assets purchased by the biggest 500 companies 35% of those
assets financed by leasing in 2004 (Alrai 2007).
After the introductory section, the remainder of this paper is organized into six sections.
The next section presents a theoretical background of this study. Section two is divided
into six subsections, namely; basics definitions and advantages of leasing, types of leases,
leases effect, leases evaluation by both the lessee and the lessor, accounting problems
caused by leases , China experience in financial leasing, and financial leasing
development in Jordan. The third section provides literature review of financial leases.
The forth section presents the research methodology. The fifth section examines the
results of this study in relation to previous theories and empirical findings followed by
conclusion and summary section.
2. Theoretical background
2.1 Basics definition and advantages of leasing
A lease is an agreement whereby the lessor conveys to the lessee in return for a payment
or series of payments the right to use an asset for an agreed period of time (IAS 17, 3).
Therefore, a lease is a contractual agreement between a lessor and a lessee that gives the
lessee the right to use specific property, owned by the lessor, for a specific period of time
in return for stipulated, and generally periodic, cash payments (i.e. rent). An essential
element of the lease agreement is that the lessor conveys less than the total interest in the
property. The growth in lease’s use suggests that it often has a genuine advantage over
owning property for both the lessee and the lessor. Some of the commonly advantages to
the lessee of leasing are: less costly financing, financing at fixed rates, protection against
obsolescence, alternative minimum tax problems, flexibility, and off-balance-sheet
financing. However, the following benefits are available to the lessor: interest revenue,
tax incentives, and high residual value (Kieso and Weygandt 1998).
2.2 Types of leases
Leasing takes several different forms, the three most important of which are: (1) salesand- leaseback arrangements, (2) operating leases, and (3) financial leases.
2.2.1 Sales- and- leaseback arrangements
Under a sales-and-leaseback arrangement, a firm that owns land, buildings, or equipment
sells the property to a financial institution and simultaneously executes an agreement to
lease the property back for a specified period under specific terms. The financial
institution could be an insurance company, a commercial bank, a specialized leasing
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Determinants of Financial Leasing in Jordan
company, or an individual investor. The sale-and-leaseback plan is an alternative to a
mortgage. Note that the seller, or lessee, immediately receives the purchase price put up
the buyer, or lessor. At the same time, the seller-lessee retains the use of the property.
This parallel to borrowing is carried over to the lease payment schedule. Under a
mortgage loan arrangement, the financial institution would normally receive a series of
equal payments just sufficient to amortize the loan while providing a specified rate of
return to the lender on the outstanding loan balance. Under a sale-and-leaseback
arrangement, the lease payments are set up in exactly the same manner- the payments are
sufficient to return the full purchase price to the investor, plus a proper return on the
lessor’s investment.
2.2.2 Operating leases
Operating leases, sometimes called service leases, provide for both financing and
maintenance. IBM is one of the pioneers of the operating lease contract. Computers and
office copying machines, together with automobiles and trucks, are the primary types of
equipment involved in operating leases. Ordinarily, these leases call for the lessor to
maintain and service the leased equipment. The cost of the maintenance is built into the
lease payments. Another important characteristic of operating leases is the fact that they
are frequently not fully amortized. In other words, the payments required under the lease
contract are not sufficient to recover the full cost of the equipment. However, the lease
contract is written for a period considerably less than the expected economic life of the
leased equipment. In addition, the lessor expects to recover all costs either in subsequent
renewal payments, through leases to other lessees, or by sale of the leased equipment. A
final feature of operating leases is that they frequently contain a cancellation clause
which gives the lessee the right to cancel the lease and return the equipment before the
expiration of the basic lease agreement. This is an important consideration to the lessee,
for it means that the equipment can be returned if it is rendered obsolete by technological
developments or is no longer needed because of a decline in the lessee’s business.
2.2.3 Financial leases
A finance lease is a lease that transfers substantially all the risks and rewards incident to
ownership of an asset. Moreover, title may or may not eventually be transferred (IAS 17,
3). Financial leases are differentiated from operating leases in that they (1) do not provide
for maintenance service, (2) are not cancelable, and (3) are fully amortized (i.e. the lessor
receives rental payments equal to the full price of the leased equipment plus a return on
investment). In a typical arrangement, the firm that will use the equipment (the lessee)
selects the specific items it requires, and then it negotiates the price and delivery terms
with the manufacturer. The user firm then arranges to have a leasing company (the lessor)
to buy the equipment from the manufacturer or the distributor. When the equipment is
purchased, the user firm simultaneously executes an agreement to lease the equipment
from the financial institution. The terms of the lease call for full amortization of the
lessor’s investment, plus a rate of return on the unamortized balance which is close to the
percentage rate the lessee would have paid on a secured term loan. For example, if the
lessee would have to pay 10 percent for a term loan, then a rate of about 10 percent
would be built into the lease contract. The lessee is generally given an option to renew
the lease at a reduced rate on expiration of the basic lease. However, the basic lease
3
Determinants of Financial Leasing in Jordan
usually cannot be canceled unless the lessor is completely paid off. Also, the lessee
generally pays the property taxes and insurance on the leased property. Since the lessor
receives a return after, or net of, these payments. This type of lease is often called a “net,
net” lease.
Financial leases are almost the same as sale-and-leaseback arrangements, the major
difference being that the leased equipment is new and the lessor buys it from a
manufacturer or a distributor instead of from the user-lessee. A sale-and-leaseback may,
then, be thought of as a special type of financial lease. Both sale-and-leaseback
arrangements and financial leases are analyzed in the same manner. Financial leases,
sometimes called capital leases.
To clarify what is meant by capital leases, we consider the following example:
If the Royal Jordanian (RJ) leases the Boeing 757 for 10 years through a non-cancelable
lease transaction with payments of the same amount as the installment purchase
transaction. There are four various views on capitalization of leases are as follows:
1. Do not capitalize any leased assets: because the lessee does not have ownership of
the property. Therefore, capitalization is considered inappropriate. Furthermore, a
lease is an “executory” contract requiring continuing performance by both parties,
because other executory contracts (such as purchase commitments and
employment contracts) are not capitalized at present, leases should not be
capitalized, neither.
2. Capitalize those leases similar to installment purchases: Accountants should
report transactions in accordance with their economic substance; therefore, if
installment purchases are capitalized. For example, the RJ is committed to the
same payments over a 10-year period for either a lease or an installment purchase;
lessees make rental payments, whereas owners make mortgage payments.
3. Capitalize all long-term leases: Under this approach, the only requirement for
capitalization is the long-term right to use the property. This property-rights
approach capitalizes all long-term leases.
4. Capitalize firm leases where the penalty for non-performance is substantial: a
final approach is to capitalize only firm non-cancelable contractual rights and
obligations. Firm means that it is unlikely performance under the lease can be
avoided without a severe penalty (Ijiri 1980).
In short, the various viewpoints range from no capitalization to capitalization of all
leases. The FASB apparently agrees with the capitalization approach when the lease is
similar to an installment purchase, noting that a lease that transfers substantially all of the
benefits and risks of property ownership should be capitalized (FASB 1980).
The previous viewpoint leads to three basic conclusions:
1. the characteristics that indicate that substantially all of the benefits and risks of
ownership have been transferred must be identified.
2. the same characteristics should apply consistently to the lessee and the lessor.
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Determinants of Financial Leasing in Jordan
3. those leases that do not transfer substantially all the benefits and risks of
ownership are operating leases should not be capitalized but rather accounted for
as rental payments and receipts (O'Brien and Nunnally 1983).
The International Accounting Standards (IAS) 17 suggests several factors, which
normally indicate that a lease is a finance lease:
1. The lease transfers ownership of the asset from the lessor to the lessee by the end
of the lease term (IAS, 17, 8(a));
2. The lessee has the option to purchase the asset at a price which is expected to be
significantly lower than the fair value of the asset at the date on which the option
becomes exercisable such that, at the inception of the lease, it is reasonably
certain that the option will be exercised (IAS 17, 8(b));
3. The lease term is for the major part of the economic life of the asset even if title is
not transferred (IAS 17, 8(c));
4. At the inception of the lease the present value of the minimum lease payments
amounts to at least substantially all the fair value of the leased asset (IAS 17,
8(d));
5. The leased assets are of a specialized nature such that only the lessee can use
them (IAS 17, 8(e));
6. Gain and losses from the fluctuation in the fair value of the residual value belong
to the lessee (IAS 17, 9(b)); and
7. The lessee has the ability to continue the lease for a secondary period at a rent,
which is substantially lower than market rent (IAS 17, 9(c)).
If a lessee capitalizes a lease, the lessee records an asset and a liability generally equal to
the present value of the rental payments. The lessor, having transferred substantially all
the benefits and risks of ownership, recognizes a sale by removing the asset from the
balance sheet and replacing it with a receivable. Having capitalized the asset, however,
not only the lessee records the depreciation, but also both parties treat the lease rental
payments as consisting of interest and principal.
As a result, if the capitalization criteria for both lessee and lessor are met, together with
strong footnote disclosure rules for operating leases are sufficient to insure that no one
will be fooled by lease financing; thus, leases will be regarded as debt, and they will have
the same effects on its cost of conventional debt, and on its cost of equity. Therefore,
leasing is not likely to permit a firm to use more financial leverage than could be obtained
with conventional debt. If the lease is not capitalized, the lessee records no asset, and no
asset is removed from the lessor’s books. When a lease payment is made, the lessee
records rental expense, and the lessor recognizes rental revenue.
2.3 Leases Effects
2.3.1 Financial Statement Effects
Lease payments are shown as operating expenses on a firm’s income statement, but under
certain conditions, neither the leased assets nor the liabilities under the lease contract
appear on the firm’s balance sheet. For this reason, leasing is often called off balance
5
Determinants of Financial Leasing in Jordan
sheet financing which permits a firm to obtain more financial leverage if it leases than if
it uses straight debt. This was cited as a major reason for leasing. Today, however, taxes
are the primary reason for the growth of financial leasing. Leasing permits the tax
shelters (depreciation expenses and the investment tax credit) to be transferred from the
user of an asset to the supplier of capital, and if these parties are in different tax brackets,
both can benefit from the lease arrangement. This point is illustrated in Table (1) by the
balance sheets of two hypothetical firms, P and L. Initially, the balance sheets of both
firms are identical, and they both have debt ratios of 50 percent. Next, each firm decides
to acquire fixed assets costing JD 1000. Firm P borrows JD 1000 to make the purchase,
so both an asset and a liability go on its balance sheet, and its debt ratio is increased to 75
percent. Firm L leases the equipment. The lease may call for fixed charges as high as or
even higher than the loan, and the obligations assumed under the lease can be equally or
more dangerous from the standpoint of financial analysis, but the firm’s debt ratio
remains at 50 percent.
Table 1: Balance sheet effects of leasing (in Jordanian Dinners)
Before asset increase
After asset increase
Firm
P&L
P*
L**
Current Assets
Debt
500
500
500 1500 500 500
Fixed Assets
Equity 500
500
1500 500
500 500
Total
1000
1000
2000 2000 1000 1000
* Firm P use borrowing or purchasing
** Firm L use financial leasing
To correct this problem, the Financial Accounting Standards Board issued FASB
statement 13, which requires that, for an unqualified audit report, firms that enter into
financial (or capital) leases must restate their balance sheets to report the leased asset as a
fixed asset and the present value of the future lease payments as a debt. This process is
called capitalizing the lease, and its net effect is to cause firms P and L to have similar
balance sheets, both of which will, in essence, resemble the one shown for firm P.
The logic behind FASB 13 is as follows. If a firm signs a lease contract, its obligation to
make lease payments is just as binding as if it had signed a loan agreement. The failure to
make lease payments can bankrupt a firm just as fast as the failure to make principal and
interest payments on a loan. Therefore, for all intents and purposes, a financial lease is
identical to a loan. This being the case, if a firm signs a lease agreement, consequently,
has the effect of raising its true debt ratio and its true capital structure is changed.
Therefore, if the firm had previously established a target capital structure, and if there is
no reason to think that the optimal capital structure has changed, then using lease
financing requires additional equity support in exactly the same manner as does debt
financing. If disclosure of the lease in Table (1) example were not made, then Firm L’s
investors could be deceived into thinking that its financial position is stronger than it
really is. Thus, even before FASB 13 was issued in 1976, firms were required to disclose
the existence of long-term leases in footnotes to their financial statements. At that time, it
was debated as to whether or not investors recognized fully the impact of leases and, in
effect, would see that firms P and L were in essentially the same financial position. Some
people argued that leases were not fully recognized, even by sophisticated investors. If
6
Determinants of Financial Leasing in Jordan
this were the case, then leasing could alter the capital structure decision in a really
significant manner (i.e. a firm could increase its true leverage through a lease
arrangement, and this procedure would have a smaller effect on its cost of conventional
debt, and on its cost of equity, than if it had borrowed directly). These benefits of leasing
would accrue to existing investors at the expense of new investors who would, in effect,
be deceived by the fact that the firm’s balance sheet did not reflect its true liability
situation.
The question of whether investors were truly deceived was debated but never resolved.
Those who believed strongly in efficient markets thought that investors were not
deceived and that footnotes were sufficient, while those who questioned market
efficiency thought that leases should be capitalized. FASB 13 represents a compromise
between these two positions, though one that is titled heavily toward those who favor
capitalization.
2.3.2 Tax effects
The full amount of the annual lease payment is a deductible expense for income tax
purposes. This makes it important that a lease contract be written in a form acceptable to
the income tax authority. In the USA, the IRS considers any agreement to be a sale if (1)
the total lease payments are made over a relatively short period and approximate the price
of the property, and (2) the lessee may continue to use the property over the remainder of
its useful life for relatively nominal renewal payments. The reason for the IRS’s concern
about these factors is that without restrictions, a company could set up a “lease”
transaction calling for very rapid payments, which would be tax deductions. The effect
would be to depreciate the equipment over a much shorter period than its Accelerated
Cost Recovery System (ACRS) class life. Therefore, if any type of contract could be
called a lease and given tax treatment as a lease, then the timing of the tax shelters could
be speeded up as compared with ownership depreciation tax shelters. This speedup would
benefit the firm, by providing high tax saving in the early years, but it would be costly to
the government.
2.4 Accounting problems caused by leases
Accounting scholars identify special features of lease arrangement that cause unique
accounting problems such as disclosing lease data (Kieso and Weygandt 1998). The
FASB statement 13 requires that the information shown in Appendix A with respect to
leases be disclosed in the lessee’s financial statements or in the notes. The same issue
presented by IAS 17, regarding lessees suggesting that an entity should disclose for each
class of asset the net carrying amount of finance leases (IAS 17; 23 (a)). An entity should
present reconciliation between the total of minimum lease payments at the balance sheet
date and their present value (IAS 17; 23 (b)). An entity should disclose the contingent
rents recognized as expenses for the period; the total of future minimum sublease
payments expected to be received under non-cancelable sub-leases at the balance sheet
date; and a general description of the lessee’s significant leasing arrangements including
the basis on which contingent rent payments are determined, the existence and terms of
renewal or purchase options and escalation charges, and restrictions imposed by lease
agreements.
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Determinants of Financial Leasing in Jordan
The FASB statement, on the other hand, requires that the lessors disclose in the financial
statements or in the notes the information shown in Appendix B when leasing “is a
significant part of the lessor’s business activities in terms of revenue, net income, or
assets.” In the same avenue, in addition to the requirements in IAS 32, a lessor should
disclose the following (Cairns 2002):
1. Reconciliation between the total gross investment in the lease at the balance sheet
date, and the present value of minimum lease payments receivable at the balance
sheet date. In addition, an entity should disclose the total gross investment in the
lease and the present value of minimum lease payments receivable at the balance
sheet date, for each of the following periods: (1) not later than one year; (2) later
than one year and not later than five years; and (3) later than five years;
2. Unearned financial income;
3. The un-guaranteed residual values accruing to the benefit of the lessor;
4. The accumulated allowance for un-collectable minimum lease payments
receivable;
5. Contingent rents recognized in income; and
6. A general description of the lessor’s significant leasing arrangements.
As indicated in appendix A and B, the disclosure requirements for the lessee are
classified as follows: (1) capital leases; (2) operating leases having initial or remaining
non-cancelable lease terms in excess of one year; (3) all operating leases; and (4) a
general description of the lessee’s arrangements. The disclosure requirements for the
lessor are classified as follows: (1) sales-type and direct financing leases; (2) operating
leases; and (3) a general description of the lessor’s leasing arrangements.
2.5 China case in financial leasing
The leasing industry in China appeared not so much post-1978 not because the law did
not permit it, but because no law or notice prevented it at that time. It was not until 1985
when the Ministry of Foreign Economic Relations and Trade (MFET) issued the Notice
on approving the Establishment of Chinese-foreign Cooperative Leasing Companies.
Foreign (principally Japanese) and Chinese-foreign joint-venture lessors, operating in an
uncertain legal environment, relied heavily on explicit or implicit local-government
guaranties rather than the creditworthiness of the lessee and the enforceability of the
contract (Ross and HSU 2001). Under capitalization, shortages of trained personnel, and
lax supervision spawned a host of irregularities among Chinese-invested leasing
companies, including failure to deliver or maintain the leased item, government
protection of lessees who failed to perform their obligations, and inaccurate record
keeping.
By the late 1990s the central government recognized that a vibrant leasing industry could
reduce upfront capital expenses, stimulate consumption, and help develop a more
comprehensive financial industry. The central government has licensed several financial
leasing companies since 1999. The Ministry of Foreign Trade and Economic Cooperation
(MFTEC) has approved 42 equity-joint-venture leasing companies, and the People’s
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Determinants of Financial Leasing in Jordan
Bank of China (PBC) has approved 15 domestic financial leasing companies. So far,
more than 300 non-bank financial institutions are exclusively or partially engaged in
financial leasing. However, Article 42 of the Commercial Banking Law prohibits banks
from engaging in commercial leasing, also the Catalogue Guiding Investment in Industry
classifies the financial leasing industry as “restricted” rather than “encouraged”.
Therefore, foreign-invested financial leasing companies may be established only as joint
ventures.
Under the administrative measures on financial leasing companies released in 2000, the
PBC seems to have claimed the licensing authority over nonblank foreign-invested
financial leasing companies. A transfer of approval authority with respect to leasing
companies would resolve the current jurisdictional inconsistency.
It is argued that for China’s leasing industry to develop, it needs a sound legislative
foundation establishing the basic elements of the transaction, the rights and obligations of
the parties, and the basis for enforcement. However, the proponents of a vigorous leasing
industry have argued that China could further stimulate expansion by providing greater
tax incentives.
Currently, after a long and rocky beginning, the prospects for the development of China’s
leasing industry have improved dramatically. A stronger legal foundation provides the
parties with substantial discretion in crafting a mutually agreeable contract. More
thorough and comprehensive supervision by PBC should have a healthy effect on the
financial leasing industry as a whole and should benefit foreign-invested lessors, who
tend to have both more experience and stronger capitalization. Nevertheless, the
prospects for crafting viable leasing arrangement in China are better than they have ever
been (Ross and Hsu 2001).
2.6 Financial leasing in Jordan
The last few years witnessed a steady grow in the financial leasing activities. The size of
operating lease-financing industry has been doubled to JD160 million, and from this
figure a total of JD80 million for 2005, alone which caused by financing mortgages. On
the other hand, the equipment financing grow about 50% and count around JD40 million.
The leasing industry expected to grow in the near future because Jordan witnessed grow
economy and the official pushed this industry forward by making some amendment on
the leasing law which clarify and defined many lease’s terms to protects both parties
(Alrai 2007). In addition, more generous tax incentives concerning depreciation and
lower business tax rate are needed. These changes in the leasing law will make a lease
financing an attractive financing option, which push the leasing industry and the
Jordanian economy one step further.
3. Literature Review
The theory of financial leasing traditionally has focused on the differential tax position of
the lessee and the lessor as the primary rationale for leasing (Bower 1973; Brealey and
Young 1980; Lewellen et al. 1976; Miller and Upon 1976; Myers et al. 1976). Brick et al.
(1987) extended the tax-based analysis to consider economies of scale in structuring lease
9
Determinants of Financial Leasing in Jordan
contracts and the cost of managing cash flows in the presence of default risk and interest
rate uncertainty. However, Krahan and Meran (1987) and Lease et al. (1990) consider the
role of information asymmetries between the lessee and the lessor regarding the residual
value of the leased asset as a further explanation for lease financing.
Empirical studies of leasing have reported high ex ante returns for lessors, and by
implication, high lease rates paid by lessees (Crawford et al. 1981; Gudikunst and
Roberts 1978; Roenfeldt and Henry 1979; Schallheim et al. 1987; Sorensen and Johnson
1977). Lease et al. (1990) documented high realized returns on financial leasing
contracts, although the realized returns were less than the expected returns. Further, they
found that realized salvage values tended to exceed greatly the actual salvage values on
which the lease contract was based. Ang and Peterson (1984) and Bowman (1980), on the
other hand, found that debt and lease financing were significantly, positively correlated,
implying that debt and lease financing are complements not substitutes. Smith and
Wakeman (1985) offer a comprehensive analysis of the rationale for leasing that helps to
explain many of these seemingly anomalous empirical findings. They argue that the Ang
and Peterson findings can be explained across firms by examining the characteristics of
firms’ investment opportunity sets. However, Marston and Harris (1988) studied changes
in the debt ratio and lease ratio (i.e. capitalized leases to total assets) for individual firms
over time and found them to be inversely related- confirming that debt and lease
financing are substitutes.
Finucane (1988) supported Ang and Peterson findings by arguing that a positive
relationship between debt and lease financing exists, and shows that firms in certain
industries, including air transport and retailing, rely more heavily on lease financing than
others. In Finucane study, however, tax-related factors were not found to be important in
explaining the level of leasing by a firm. Such result could be justified by arguing that
Finucane looked only at “capital” leases, as defined by FASB Statement 13, and
therefore, tax factors would not be expected to be important because the Internal Revenue
Services (IRS) treats most capital leases as installment sales contracts for tax purposes.
Opposite Finucane results, Vora and Ezzell (1991) found significant tax rate differences
between lessees and lessors, although they found that the lessee’s tax rate is not
necessarily lower than the respective lessor’s.
In Lewis and Schallheim (1992) model, non-debt tax shields are sold, via leasing, thereby
reducing the potential redundancy with interest deductions and making the marginal
value of debt positive. The lessee responds by issuing additional debt, which accounts for
the positive relationship between debt and lease financing. The benefit from leasing in
this model is realized even if the marginal tax rate is the same for the lessee and lessor.
Moreover, many researchers suggest that secured debt is a financial contracting
mechanism aimed at reducing the potential agency costs of debt (Barro 1976; Benjamin
1978; Jackson and Kronman 1979; Smith and Warner 1979).
Stulz and Johnson (1985) formalize the earlier analysis and show that secured debt
reduces potential risk-taking behavior of the borrower and thus reduces monitoring costs
10
Determinants of Financial Leasing in Jordan
to the lender. Leeth and Scott (1989) found that secured debt is positively associated with
loan default probability, asset marketability, and loan size.
Krishnan and Moyer (1994) examined the lease/borrow decision, giving explicit
recognition to the role bankruptcy costs play and to the relative transactions costs of
leasing and borrowing. Their empirical analysis shows that lessee firms have lower
retained earnings relative to total assets, higher growth rates, lower coverage ratios,
higher debt ratios, and higher operating risk than non-lessee firms. Leasing is shown to
involve lower bankruptcy costs than borrowing. Overall, their results indicate that as
bankruptcy potential increases, lease financing becomes an increasingly attractive
financing option. In the event of a default on a lease prior to bankruptcy, a lessor is
entitled to recover damages consistent with the damages-on-default provision contained
in the lease. This provision normally takes the original cost of the asset, subtracts the
expected salvage value at the termination of the lease, and applies some form of
accelerated depreciation over the remaining amount to determine the amount of recovery.
Ross and Hsu (2001) offer a comprehensive analysis of the leasing industry in China,
which is becoming a viable avenue for foreign investors after encountering serious
difficulties in the late 1980s and early 1990s. Lower business tax rate are available under
financial leases- provided that the contract makes the critical distinction between a sale of
goods and a lease. Even more generous tax incentives concerning depreciation, which
would hasten the development of the leasing industry, would have to overcome strong
resistance from the Ministry of Finance, and for the foreseeable future remain unlikely.
4. Methodology and Hypothesis
It would be more valuable if data from annual reports provided for those companies have
used the financial leasing. Such data will be used to investigate the characteristics
adopted by previous empirical studies of such companies and whether they have different
performance, liquidity, and capital structure compared to those companies listed on
Amman Stock Exchange (ASE) not using the financial leasing. Therefore, estimates like
retained earnings relative to total assets, higher growth rates, lower coverage ratios,
higher debt ratios, and higher operating risk could be employed. In addition, financial
leasing has just started to be used by Jordanian companies listed on ASE, beside the fact
that the financial consequences of using financial leasing expected to be recognized on
the long run not on the short run. Therefore, the methodology used in this paper relied on
the questionnaire instead of using companies’ annual reports for testing the importance of
such financing method on companies’ future.
The questionnaire has 20 questions covering the four variables, namely; the use of
financial leasing as a dependent variable, tax and accounting issues, legislations, and
marketing as independent variables. The structure of the questionnaire as follows,
questions from one to four related to the dependent variable, questions from five to
thirteen related to tax and accounting issues variable, questions from fourteen to sixteen
related to legislations variable, and finally questions from seventeen to twenty related to
marketing variable.
11
Determinants of Financial Leasing in Jordan
The sample selected was the financial managers, or their representatives, in the industrial
companies listed on ASE. One hundred fifty questionnaire were distributed, and the
returned representing 65%.
To examine the effect of tax and accounting issues, legislations, and marketing on the use
of financial leasing, the following null hypothesis is proposed:
“H01: There is no influence tax and accounting issues, legislations, and marketing on the
use of financial leasing”.
In order to make our hypotheses more concrete, we specify and estimate an empirical
model linking tax and accounting issues, legislations, marketing, and the use of financial
leasing. The models to be estimated are the following equations:
LEAS = α0 + β1TAC + β2LEG + β3MAR + ε
Where: for firm i at time t, α is the constant term, β is a vector of regression slope, LEAS,
TAC, LEG, ans MAR are vectors of financial leasing, tax and accounting issues,
legislations, marketing, respectively. Moreover, еit is the disturbance terms. The
disturbance term represents two sets of factors. First, it represents the effect on the
dependent variable (firm performance) of all variables other than the ones included in the
study. Second, even if the variable included were the only identifiable variable
influencing the dependent variable, it should not expected that the same level of
dependent variable would stay year after year. The disturbance term, therefore, is
included to allow for the basic random unpredictability of human behavior (Thomas
1997).
The multivariate analysis carried out in this study is not only multiple regression routines
but also stepwise regression technique in order to determine which explanatory variables
are “best” in explaining firm performance variation over the period under consideration.
The us of financial leasing was the dependent variable and the independent variables
were tax and accounting issues, legislations, marketing.
One of the problems of undertaking any multiple analyses is that there may be
multicollinearity between independent variables. The multiple regression models assume
that there is no linear relationship between the values of the independent variables. If the
linear relationships exist then it becomes impossible to compute the estimators (ßi). It is
stated that the variances and hence standard errors of the estimators (coefficients of the
explanatory variables) will tend to be large (inflate standard errors) whenever there is a
high degree of multicollinearity (Thomas 1997). Since there is no reason why
multicollinearity should affect our estimators of these standard errors, their size will be
reflected in any estimated standard errors that we compute. This is the major possible
adverse factor when multicollinearity is present - large standard errors and hence large
estimated standard errors. That is, our estimates will lack precision and we will be very
uncertain about true parameter values. Therefore, multicollinearity checked not only by
testing for Pearson Correlation Coefficients as it has been adopted by previous empirical
12
Determinants of Financial Leasing in Jordan
studies (Street and Bryant 2000; Wallace and Naser 1995; Wallace et al. 1994)1, but also
by running the stepwise regression technique (Malone et al. 1993). (Malone et al. 1993)
reported that an examination of the regression coefficients was made at each step of the
stepwise procedures. This examination showed that as variables were removed from the
model, the coefficients of these variables, their standard errors, and the mean-square error
remained relatively stable. In the presence of multicollinearity, as variables were
removed, one would expect these values to exhibit instability.
An important point to note is that, in order to undertake ordinary least-squares (OLS)
multiple linear regression, the data must fulfil certain conditions, i.e. normality,
homogeneity (equal variance), uncorrelated2 and linearity. The most commonly suggested
approach to check whether or not the data fulfil these conditions is an analysis of the
residuals (Kinnear and Gray 1995; Norusis 1995). In this study a Q-Q plot of residuals
was analysed and formal tests of normality of residuals (skewness, kurtosis and K-S
Lilliefors) were undertaken to check the normality assumption (Norusis 1995).
Furthermore, the linearity and homogeneity assumptions were checked by analysing the
scatterplots of the regression standardised predicted values against the residuals (Kinnear
and Gray 1995). Finally, a commonly used statistic for testing the existence of
autocorrelation among residuals is the Durban-Watson (DW) statistic, which will be,
employed (Maddala 2001). However, since the study using the questionnaire approach in
testing the hypothesis, Cronbach Alpha was adopted for testing whether the questions
included measuring the variables considered. As Cronbach Alpha was 77.15%, such
result highlighting the fact that the questions built up were strong enough to measure the
variables considered.
5. Results Discussion
The descriptive analysis shows that 90% of the sample were males, while the rest were
females. In addition, most of the candidates age between 26 to 30 and 31 to 35,
representing 40% and 33% of the sample, respectively. Table 2 provides the results in
more details.
Table 2: Study Sample Descriptive Analysis
Variable
Sex
Male
1
Percentage (%)
90
When we test for the multicollinearity, we look at the correlation coefficients, which should not be
considered harmful until they exceed 0.80 as it is argued by Judge et al. (1985) while Street and Bryant
(2000) argued that it should not exceed 0.90. Wallace et al. (1994), however, considered coefficient of
correlation exceeding 0.77 high enough to cause multicollinearity concern.
2
Correlation between the error terms arising in time-series data which called autocorrelation or serial
correlation. If autocorrelation exists, that means the error term ut at time period t is correlated with error
terms ut+1, ut+2,… and ut-1, ut-2,… and so on. Such correlation in the error terms often arises from the
correlation of the omitted variables that the error term captures. The correlation between ut and ut-k is
called an autcorrelation of order k. the correlation between ut and ut-2 is called the second-order
autocorrelation and is denoted by ρ2, and so on. Hence, there are (n-1) such autocorrelations if we have n
observations. The consequences of autocorrelation errors are: 1) the leas squares estimators using the
multiple regression are unbiased but are not efficient, and 2) the sampling variances are biased and
sometimes likely to be seriously understated. Thus, R² as well as t and f statistics tend to be exaggerated
(Maddala, 2001).
13
Determinants of Financial Leasing in Jordan
Age
Education Level
Experience
Female
25 years or below
26-30 years
31-35 years
36 years or higher
Secondary school or below
Diploma
Bachelor
Master or higher
5 yeas or below
6-10 years
11-15 years
16 years or higher
10
6.7
40
20
33.3
6.7
6.7
80
6.7
23.3
36.7
16.7
23.3
As it can be seen from Table 2 that most of the sample has bachelor degree representing
80%. Most of the sample has six to ten years of experience representing almost 37%
followed by those who have five years of experience or less and sixteen years of
experience or more representing both 23% of the study sample.
Table 3 provides the correlation matrix of the variables used in the multivariate analysis.
As it can be seen, the correlation coefficients reported indicated that there is a positive
correlation between all explanatory variables and the use of financial leasing as a
dependant variable.
Table 3: Correlation Matrix
LEAS
1.0000
LEAS
0.529**
TAC
0.426*
LEG
0.485*
MAR
TAC
LEG
MAR
1.0000
0.395*
0.451*
1.0000
0.579**
1.0000
Pearson 2-tailed tests are indicated as: * < 0.1; ** < .05; *** < 0.01
The correlation coefficient was positively significant with all independent variables (i.e.
significant at 0.01 level between LEAS and TAC, but significant at 0.05 level between
LEAS and both; LEG and MAR). Such results supporting the theoretical argument
mentioned in the theoretical background section.
This paper has examined the impact tax and accounting issues, legislations, and
marketing on the use of financial leasing for companies listed on ASE using the OLS
model. Table 4 reports the results.
Table 4: Tax & Accounting, Legislations, and Marketing Influence on the Use of
Financial Leasing
Constant
TAC
LEG
MAR
-0.294
0.574
0.202
0.231
ß
-0.288
2.061**
0.744
1.178
t-statistics
14
Determinants of Financial Leasing in Jordan
a Dependent Variable: Financial Leasing
F Value
R2
Durbin-Watson
5.077*
0.369
2.020
P-values test the null hypothesis that the restriction is not valid at the 0.05 level. T-statistics figures and F values are
with the following levels of significance indicated: * < 0.1; ** < .05; *** < 0.01, two-tailed tests.
Table 4 shows that F value was significant meaning that the explanatory variables
considered influencing the dependant variable. In addition, R2 quite high (i.e. 37%)
confirm the result mentioned above. Correlation between the error terms arising in timeseries data which called autocorrelation or serial correlation. If autocorrelation exists, that
means the error term ut at time period t is correlated with error terms ut+1, ut+2,… and
ut-1, ut-2,… and so on. Such correlation in the error terms often arises from the
correlation of the omitted variables that the error term captures. The correlation between
ut and ut-k is called an autcorrelation of order k. the correlation between ut and ut-2 is
called the second-order autocorrelation and is denoted by ρ2, and so on. Hence, there are
(n-1) such autocorrelations if we have n observations. The consequences of
autocorrelation errors are: 1) the least squares estimators using the multiple regression are
unbiased but are not efficient, and 2) the sampling variances are biased and sometimes
likely to be seriously understated. Thus, R² as well as t and F statistics tend to be
exaggerated (Maddala 2001). Therefore, since the value of Durbin-Watson was around
two, it means that autoccorelation problem did not exist.
It is found that all independent variables considered influenced positively the use of
financial leasing for companies listed on ASE. Such result supported by the theoretical
and empirical work presented in the paper. However, the only variable influenced
significantly the dependent variable is the tax and accounting, while other variable did
not have significant influence. Therefore, it could be argued that tax and accounting is an
important factor in determining the use of financial leasing by Jordanian companies.
6. Summary and Conclusion
In this paper we examine the influence of tax and accounting, legislations, and marketing
on the use of financial leasing. Using a questionnaire developed by the researchers, we
found evidence that tax and accounting issues yields significant positive effect on the
dependent variable. Moreover, legislations and marketing variables influence were
positive, but not significant.
Such findings suggest that in order to market such new method of financing companies’
activities, the country should pay more attention on developing new legislations having
more tax privileges for companies using such method.
15
Determinants of Financial Leasing in Jordan
Appendix A
Capitalization Criteria for Lessee:
1. The lease transfers ownership of the property to the lessee.
2. The lease contains a bargain purchase option.
3. The lease term is equal to 75% or more of the estimated economic life of the
leased property.
4. The present value of the minimum lease payments (excluding executory costs)
equals or exceeds 90% of the fair value of the leased property.
16
Determinants of Financial Leasing in Jordan
Appendix B
Capitalization Criteria for Lessor:
Group A
1. The lease transfers ownership of the property to the lessee.
2. The lease contains a bargain purchase option.
3. The lease term is equal to 75% or more of the estimated economic life of the
leased property.
4. The present value of the minimum lease payments (excluding executory costs)
equals or exceeds 90% of the fair value of the leased property.
Group B
1. Collectibility of the payments required from the lessee is reasonably predictable.
2. No important uncertainties surround the amount of unreimbursable costs yet to be
incurred by the lessor under the lease (lessor’s performance is substantially
complete or future costs are reasonably predictable).
17
Determinants of Financial Leasing in Jordan
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