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AbstractWe first investigate the factors influencing the industrial firm's decision to use fixed payment financing or regular debt plus leasing. We find that the level of fixed financing is positively related to the portion of fixed assets in the firm and negatively related to profitability, risk, and the levels of both advertising and R&D expenditures. We then focus on the more interesting issue of why firms lease instead of use regular borrowing. Using additional variables along with the residuals from the initial regression, the firm's tax position, agency costs, and bankruptcy costs, and asymmetric information are significant factors in predicting leasing levels as others have found. We also find that firms that use more fixed form financing than predicted also use lower portions of leasing. This is consistent with leasing and regular debt being substitutes. In quartile splits on total leverage, firms with high levels of regular debt also have higher levels of leasing, which is consistent with Ang and Peterson's [J. Finance 39 (1984) 1055.] earlier empirical study on lease financing levels. Our results are robust regardless of how leasing is measured. We consider operating leases, capital leases, and all leases. For regular debt, we considered both all debt and funded debt. These values are scaled by the market value of total assets.

This paper empirically considers economies of scale that firms must reach to be considered viable ongoing entities. These are estimated from the selling prices of actual firms in two broad industries — service and manufacturing. For service firms, the minimum size is $10 million in annual revenues and for manufacturing firms, it is smaller at $6 million in sales to reach economies of scale. Traditional economic theory considers firms becoming more efficient with increasing size until they reach an optimal economy of scale. Until they reach that size, we show that they cannot be considered truly ongoing firms and cannot be valued directly as the present value of future earnings. When firms are also independent of their owner/manager, we consider that a viable ongoing entity exists.

ABSTRACTSimulation techniques have been recommended in the recent literature as vehicles for improving the analysis of the corporate capital budgeting decision. Such techniques are alleged to provide more helpful measures of both return and risk than do single‐point discounted cash flow estimates of project worth. This contention is challenged here. The conclusion is reached that the information provided by simulation is, at best, no better than is generated by the traditional single‐point present value approach and, in one very important respect, is markedly inferior.