Operating leasing is an important off-balance sheet financing and accounts for a large fraction of firms’ external financing. This paper investigates the role of operating lease in improving firms’ capital allocation efficiency at industry level. I find that operating leasing can alleviate capital misallocation through two channels. First, by incorporating operating leased capital, the actual capital input of firms are quantified more accurately. The extent of capital misallocaton with leased capital is saliently lower. Second, operating leasing can alleviate capital misallocation by granting financially constrained firms higher debt capacity. Using a panel regression, I provide empirical evidence indicating that the extent of capital misallocation is negatively related to lease...[ Read more ]

Operating leasing is an important off-balance sheet financing and accounts for a large fraction of firms’ external financing. This paper investigates the role of operating lease in improving firms’ capital allocation efficiency at industry level. I find that operating leasing can alleviate capital misallocation through two channels. First, by incorporating operating leased capital, the actual capital input of firms are quantified more accurately. The extent of capital misallocaton with leased capital is saliently lower. Second, operating leasing can alleviate capital misallocation by granting financially constrained firms higher debt capacity. Using a panel regression, I provide empirical evidence indicating that the extent of capital misallocation is negatively related to leased capital ratio. Besides, I quantitatively identify the causal effect of operating leasing on alleviating capital misallocation by adopting PSM-DID strategy.