Product Market Threats and Leases

ABSTRACT We document robust evidence of increased corporate leasing in the presence of product market threats. This finding is robust to a battery of tests exploiting plausibly exogenous variation in product market threats to address the potentially endogenous nature of leasing and product markets, including Chinese import penetration, the granting of normal trade relations to China by the United States, excess entry into product markets in the 1990s, and deregulation of the telecommunications industry. The effects are pronounced for financially constrained firms and firms that are more likely to face costly investment reversals. A limited supply of leased capital limits leasing but amplifies precautionary cash holdings in the presence of competition. In additional analysis, we find that increased leasing correlates to a diminished impact of product market threats on firm performance. Collectively, the evidence suggests that leases provide an alternative to cash holdings to mitigate the negative effects of product market threats.