Journal of Corporate Finance 69 (2021) 102008

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Journal of Corporate Finance

journal homepage: www.elsevier.com/locate/jcorpfin

Operating lease obligations and corporate cash management☆

Douglas O. Cook a, Robert Kieschnick b, *, Rabih Moussawi c
a
Department of Finance, The University of Alabama, Culverhouse College, Tuscaloosa, AL 35487, United States of America
b
School of Management, SM 31, The University of Texas at Dallas, Richardson, TX 75083-0688, United States of America
c
Department of Finance & Real Estate, Villanova School of Business, Villanova University, Villanova, PA 19085, United States of America

A R T I C L E I N F O A B S T R A C T

JEL codes: Our study addresses two issues overlooked in prior research: Does a firm’s future operating lease
M41 obligations influence its current cash holdings? Does this relationship contribute to the temporal
G32 increase in corporate cash holdings? We provide evidence that these future obligations signifi­
Keywords: cantly influence a firm’s cash holdings and contribute to the temporal increase in U.S. corporate
Operating leases cash holdings. Consequently, our findings are consistent with the options offered by operating
Cash
leases to young growing firms and the effect of these operating lease obligations on the firm’s
Off-balance sheet
operating leverage.

1. Introduction

What is the effect of a firm’s future operating lease obligations on its current cash holdings? Does the temporal increase in operating
lease obligations help to explain the temporal increase in U.S. corporate cash holdings? In this study, we address these two issues that
have been overlooked in prior research.
Concerning the first issue, we note that increases in a firm’s future operating lease obligations increase its degree of operating
leverage in the future since these are fixed costs that do not vary with output. Consistent with this point, Cook et al. (2019) provide
evidence that a firm’s operating leases are a determinant of a firm’s operating leverage and its asset volatility. Consequently, one might
expect operating leases to also influence a firm’s precautionary cash holdings.
Further, are these effects, the same or different than those associated with a firm’s financial leverage? Several studies (e.g., Raul and
Sufi (2012), Bratten et al. (2013), etc.) argue that operating lease obligations are close substitutes for a firm’s debt. Complementing the
academic evidence is the fact that the International Accounting Standards Board and the Financial Accounting Standard Board now
require firms to report the present value of these obligations on their balance sheets.
As standard textbook demonstrations illustrate, the use of either operating leverage or financial leverage do not in and of them­
selves cause volatility in a firm’s earnings. Rather, they exacerbate the effects of volatility in a firm’s sales. Consequently, it is the
interaction between the volatility of a firm’s sales with either its future debt or operating leases claims that should influence a firm’s
current cash holdings.
However, a firm’s failure to pay its future debt obligations does not have the same implications as its failure to pay its future

☆
We thank Toni Whited, Jarrad Harford, participants in the 2017 Financial Management Association and the 2018 Paris Financial Management
Conference, and our anonymous referees for comments on prior drafts. Cook gratefully acknowledges financial support from the Ehney A. Camp, Jr.
Chair of Finance and Investments.
* Corresponding author.
E-mail addresses: dcook@cba.ua.edu (D.O. Cook), rkiesch@utdallas.edu (R. Kieschnick), rabih.moussawi@villanova.edu (R. Moussawi).

https://doi.org/10.1016/j.jcorpfin.2021.102008
Received 4 November 2019; Received in revised form 31 May 2021; Accepted 6 June 2021
Available online 8 June 2021
0929-1199/© 2021 Elsevier B.V. All rights reserved.
D.O. Cook et al. Journal of Corporate Finance 69 (2021) 102008

operating lease obligations. When a firm fails to pay its debt claims, then its creditors can force it into bankruptcy. When a firm fails to
pay its operating lease obligations, its lessors can re-claim the leased assets, and so the firm loses the use of those assets. Thus, the
relative implications of a firm’s future debt or operating obligations for the firm’s cash holdings, conditional on its sales volatility, is
unclear.
This discussion leads to our second issue. Rampini and Viswanathan (2013) develop a model that predicts that smaller and younger
firms lease their tangible assets, which permits them to grow faster. Srivastava (2014), Barrero (2016), Loy and Hartlieb (2018), and
others note that the mix of firms in the U.S. economy has evolved over time. These newer firms typically face a high degree of sales
volatility. If these young and growing firms use operating leases to increase their operating flexibility, then we can expect them to use
more operating leases than firms with more predictable sales and lower sales volatility. Consistent with this point, Deener (2017) notes
these new companies “can scale up or down quickly without spending a lot of money on plant, equipment, computers, or people. They
simply rent or contract for them.”
Consequently, we expect an increase in the use of operating leases over time, given the shift towards more R&D intensive firms
focused on innovation in either physical products or information products, and typically associated with higher sales volatility.
Consistent with this linkage, the International Financial Accounting Standards Board (IFAS) staff documents in support of IFRS 16 the
importance of operating leases to these types of firms and the temporal increase of such leases.1 But if they do hold more operating
leases, then the combination of higher operating leverage and higher sales volatility should lead them to hold more cash for pre­
cautionary purposes. Consequently, the question arises as to whether the temporal increase in U.S. corporate cash holdings reflects the
temporal increase in operating lease obligations?
Since both issues require empirical resolution, we use data on U.S. corporations between 1980 and 2014 to address them. We find
evidence for the following key conclusions. First, we follow Hainmueller (2012) and Funk et al. (2011) and employ a double robust
counterfactual framework to support our causal argument that a firm’s future operating lease obligations will lead it to increase its cash
holdings. Moreover, we find evidence that corporate cash holdings are positively correlated with the interaction between the volatility
of its sales and either its use of debt or operating leases.
However, our evidence suggests that the interaction between a firm’s sales volatility and the present value of its future operating
lease obligations exercise a greater and more statistically significant influence on a firm’s cash holdings than does the interaction
between its sales volatility and the present value of its future debt obligations. Consequently, our evidence suggests that a firm’s future
operating leverage exercises a greater influence on its current cash holdings than its future financial leverage. This evidence may
reflect the fact that the cash flow volatility that debt holders face is driven by the firm’s sales volatility and operating leverage.
Turning to our second issue, we use Srivastava’s (2014) SGA intensity metric to sort firms by decade in order to examine key aspects
of the change in firm composition story. These analyses present evidence of a strong relationship between SGA intensity, R&D in­
tensity, sales volatility, and operating lease intensity. Thus, our evidence suggests that the kinds of firms that increasingly populate the
U.S. economy, typically focused on innovation, face greater sales volatility and appear more likely to use operating leases to acquire
operating assets. Tying the temporal increase in the use of operating future operating lease obligations with the temporal increase in
corporate cash holdings, we find evidence that the secular rise in average corporate cash holdings is co-integrated with the average
anticipated future operating lease obligations. While not the cause, the increased use of operating leases has contributed to the
temporal increase in corporate cash holdings.
Altogether, we interpret our evidence as implying three important ideas. First, a firm’s future operating lease obligations, con­
ditional on its sales volatility, significantly influence its current cash holdings. Second, conditional on the volatility of a firm’s sales, the
firm’s future operating lease obligations exercise a more significant influence on its current cash holdings than does its future debt
obligations. Third, consistent with Rampini and Viswanathan (2013) and the firm composition story, growing firms facing high sales
volatility and use operating leases to acquire assets. Consequently, the increased use of operating leases has contributed to the tem­
poral increase in corporate cash holdings.
To present the evidence for our conclusions, we organize our paper as follows. Section 2 provides a brief review of the literature.
Section 3 describes our sample and principal variables. Section 4 examines whether increases in a firm’s operating lease obligations is
associated with an increase its cash holdings, or vice versa. Section 5 explores the impact of the interaction between the volatility of a
firm’s operating cash flows and its debt and future operating lease obligations on the variation in corporate cash holdings. Section 6
first investigates aspects of the change in firm composition argument. Then it addresses whether the temporal increase in average
corporate cash holdings is cointegrated with the temporal increasing average future operating lease obligations. Section 7 concludes by
summarizing our findings.

2. Review of the literature

2.1. Why might a firm’s future operating lease obligations influence its cash holdings

A firm’s future operating lease obligations might influence its cash holdings because it increases a firm’s degree of operating
leverage in the future, and thereby influences its future fluctuations in its earnings and cash flows. Consistent with this point, Cook

1
The IFAS staff reports reveal that the increased use of operating leases is prevalent across industries and across developed economies – not just
the United States. In 2005, the U.S. Securities Exchange Commission estimated that registrant firms held $1.25 trillion in off-balance sheet lease
obligations.

2
D.O. Cook et al. Journal of Corporate Finance 69 (2021) 102008

et al. (2019) provide evidence that a firm’s operating lease obligations are a determinant of a firm’s degree of operating leverage and,
thereby, its asset volatility.
While focused on a different issue, Han and Qiu (2007) provide an investment story such that financially constrained firms will hold
cash balances so that future cash flow volatility does not prevent a firm from pursuing its first best future investment opportunities.
While they focus on a firm’s debt obligations, one could reasonably expand their model to account for operating lease obligations given
the effects of such on the fluctuations in a firm’s future cash flows. Consistent with this point, Rampini and Viswanathan (2013)
develop a model that predicts that smaller and younger firms, that are likely to be financially constrained, will lease their tangible
assets and that this will permit them to grow faster.
The above considerations suggest that young firms will tend to use operating leases to acquire assets, and yet these same firms will
experience significant sales volatility. Young firms are frequently involved in a struggle to grow market share and Fairhurst et al.
(2021) provide evidence that product market threats increase the use of leased capital.2 Further, young firms’ use of operating leases
will increase their operating leverage and for any given level of sales volatility, increase the volatility of their income and cash flows,
which should increase their precautionary cash balances.
The evidence regarding this last relationship is unclear from prior research. Eisfeldt and Rampini (2009) regress a firm’s rental
expense (a period expense) on several variables, including its end-of-period cash holdings, and report evidence of a negative coefficient
on their cash holdings variable. However, this evidence does not help to address the issues we are studying because a rental expense is a
current period expense that will mechanically and negatively relate to the end-of-period cash balance. We are focused on how its future
operating lease obligations, conditional on its sales volatility influences its current cash holdings.

2.2. Operating lease obligations, debt obligations, and cash holdings

Several studies (e.g., Raul and Sufi (2012), Bratten et al. (2013), etc.) argue that operating lease obligations are close substitutes for
a firm’s debt. Complementing the academic evidence is the fact that the International Accounting Standards Board and the Financial
Accounting Standard Board now require firms to report the present value of these obligations on their balance sheets.
However, a firm’s failure to pay its future debt obligations does not have the same implications as its failure to pay for its future
operating lease obligations. When a firm fails to pay its debt claims, then its creditors can force it into bankruptcy, but the firm does not
necessarily lose the use of its assets. Further, it can restructure the claims on the firm. When a firm fails to pay its operating lease
obligations, its lessors can re-claim the leased assets, and so the firm loses the use of those assets.
Consistent with this point, Ambrose et al. (2019) argue that credit risk is instrumental in understanding the trade-off between debt
and leases. Cornaggia et al. (2013) discuss these and other rationales for the choice between debt and operating leases. This literature
raises the question of whether a firm’s future operating lease obligations or its future debt payment obligations influences its cash
holdings in the same way and to the same degree.

2.3. Operating lease obligations and the temporal increase in cash holdings

There are two basic stories being offered for the temporal increase in U.S. corporate cash holdings. The first story is that there has
been a temporal change in the composition of firms in the U.S. economy, specifically a shift towards more R&D intensive firms focused
on innovation in either physical products (e.g., computers, cell phones, etc.) or information products (e.g., software, etc.). These
changes give rise to more uncertainty about a firm’s future operating cash flows, and hence an increase in its cash holdings.
As noted earlier, Rampini and Viswanathan (2013) develop a model that predicts that smaller and younger firm will lease their
tangible assets and that this will permit them to grow faster. Consistent with this point, Adams and Hardwich (1998) report evidence
that smaller U.K. firms with more growth options than assets-in-place tend to lease more. Thus, it may not be surprising that Cornaggia
et al. (2015) document that operating leases as a proportion of total debt increased 745% from 1980 through 2007 in the United States.
Supporting this result, Fairhurst et al. (2021) point out that assets acquired through operating leases currently account for more than
one-third of U.S. corporate physical assets. Thus, it may not be surprising that the changing of mix story is associated with an increase
in the use of operating leases.
Consequently, we argue that if there has been an increase in the mix of firms facing sales volatility (for whatever reason), and they
have chosen to acquire real assets through operating leases, then, based on our earlier operating leverage argument, we might expect
the temporal increase in corporate cash holdings to be cointegrated with the temporal increase in corporate operating lease obliga­
tions. Evidence to this effect would support the important contribution of operating lease usage to explaining the increase in corporate
cash holdings.
The second story involves the cost of carry. Azar et al. (2016) argue that the opportunity cost of holding cash is an important in­
fluence on a firm’s decision to hold cash. Moreover, the opportunity cost of holding cash has changed with the ability of U.S. cor­
porations to earn a return on their cash holdings, more specifically by investing in marketable securities, and so has lowered their cost
of carry. As a result, firms have increased their cash holdings.
None of the above stories are mutually exclusive and so may all play a role in explaining the temporal increase in U.S. corporate
cash holdings.

2
They point out that operating leases currently represent more than 1/3 of average U.S. corporate real assets.

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D.O. Cook et al. Journal of Corporate Finance 69 (2021) 102008

3. Sample and variables

We construct our sample by starting with the universe of all U.S. corporations in the CRSP and Compustat databases from 1980
through 2014. We filter out firms in administrative (SIC codes above 9000), regulated (SIC codes between 4000 and 4999), and
financial (SIC codes between 6000 and 6800) industries to end up with 159,553 firm-year observations.3 We discuss below detailed
information regarding the construction of each variable and provide a table with summary descriptions of various variables in
Appendix A. Table 1 provides descriptive statistics.

3.1. Cash holding measures

Following prior research on the determinants of corporate cash holdings, we create two cash holding measures:

Cashm1 = cash and marketable securities/(total assets – (cash and marketable securities)). This measure is the primary cash
holdings measure used in Opler et al. (1999). Since this variable is a non-negative random variable, we follow prior research and
use the logarithm of this measure in our regression models.
Cashm2 = cash and marketable securities/total assets. This alternative measure is either the primary or secondary cash holdings
measure in some prior studies on corporate cash holdings. Since this variable is a fractional variable, we use the logistic trans­
formation of this measure in some analyses and a fractional logit regression model when it is the dependent variable.

Interestingly, these two cash variables do not quite measure the same thing as we find their correlation to be 0.22 if not winsorized
and 0.85 if winsorized. Outliers appear to influence Cashm1 more than Cashm2. While Cashm2 captures the proportion of a firm’s assets
in cash and marketable securities, it is not clear what the ratio of cash and marketable securities to all other assets, Cashm1, is capturing
because it is neither a standard liquidity measure nor a perfect net debt concept. For these reasons, we place more emphasis on the
evidence for Cashm2 than Cashm1 in our subsequent analyses. Regardless, we derive similar conclusions using either measure.

3.2. Control variables

We create several variables to control for various influences on a firm’s corporate cash holdings.

Ln(sale) = logarithm of total assets. We use this measure as a firm size control. However, it also a measure of the firm’s total cash
inflows.
NI/ta = ratio of net income to total assets, a return measure.
Cogs/sale = ratio of the firm’s cost of goods sold to its sales. This variable measures how much of a firm’s total cash inflow is
accounting for by its cost of goods sold.
SGA = sales and general administrative expenses/sales. This variable is Srivastava’s (2014) measure of the intangible intensity of a
firm. We do not include it in our regressions since it also includes a firm’s operating lease expense.
Netwc/TA = [(current assets – cash and marketable securities) – current liabilities]/total assets, defined as in Opler et al. (1999).
CAPX/TA = capital expenditures/total assets, defined as in Opler et al. (1999).
R&D expense = research and development expense/sales. Following prior practice, we convert missing values for R&D expenses to
zeros. Several studies of corporate cash management use this variable.
NetEquity/TA = (stock issuance – stock repurchases)/total assets. This measure controls for new cash holdings due to net new
common and preferred stock issuances.
Market-to-book = (book value of assets – book value of equity + market value of equity)/book value of assets. This variable is
defined as in Opler et al. (1999) and subsequent studies and is used as a proxy for the market’s assessment of the firm’s future
growth prospects.
LT Debt = total long-term debt/total assets. We use this measure of a firm’s future debt obligations. Note, however, it does not
include the firm’s fixed obligations represented by operating leases.
Treasury bill rate: We use either Treasury bill rate at the firm’s fiscal year-end (Treasury bill rate) and the average Treasury bill rate
over its fiscal year as measures of its cost of carry based on the evidence in Azar et al. (2016).
Salesvol is a measure of the volatility of a firm’s gross profit margin using the same methodology as, for example, DeVeirman and
Levin (2011). Specifically, we use the residuals from the following regression model:
ΔSalesit = β0 + β1 YEAR + β2 IND + β3 YEAR*IND + εit (1)

where ΔSalesit is the change in sales from year t-1 to t, YEAR is a vector of year dummies, and IND is a vector of industry dummies. We
use the S&P’s GICS sector delineations as they are adequate to capture differences across industries and yet broad enough to estimate
firm variation within each delineation. Based on the residuals from the above regression model, we derive the following volatility

3
We also filtered out observations with negative sales, observations with negative operating lease obligation, and observations with zero cash
holdings. Firms with zero cash holdings are typical shell companies and not operating companies.

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D.O. Cook et al. Journal of Corporate Finance 69 (2021) 102008

Table 1
Summary statistics.
Count Mean Median Std Dev Max Min

Cashm1 159,480 0.3088659 0.0723252 0.7962701 5.781947 0.0000007

Cashm2 159,524 0.1415041 0.0674926 0.1829739 0.8547555 0.0000007
Ln(sale) 160,811 4.688127 4.757617 2.632483 13.08885 − 6.907755
NI/ta 163,971 − 0.1077882 0.0238805 0.474143 0.2980886 − 3.279701
Cogs/sale 156,553 0.8497166 0.684276 1.326979 11.99452 0.0997584
R&D 156,553 1.444409 0 84.7964 25,684.4 1.125
Netwc/ta 155,101 0.0757158 0.0664205 0.1664041 0.3412955 − 0.1907242
Capx/ta 157,597 0.0721912 0.0453006 0.0828602 0.4678606 0
Dividend 159,570 0.3574607 0 0.4792536 1 0
Netequity/ta 147,674 0.070041 0.0002635 0.2122901 1.229539 − 0.1504637
Market-to-book 138,546 2.123543 1.389278 2.460913 18.4402 0.5543428
Treasury bill rate 159,578 4.726501 4.93 3.366098 16.3 0.01
Salesvol 136,849 456.6706 101.8759 2424.153 221,683.1 0
LTdebt 159,462 0.23677 0.1745767 0.2480239 1.460473 0.0004096
Smrc1 156,553 0.10354 0.0107389 2.836318 453 0
Smrc2 156,553 0.0845062 0.0080768 2.310365 429.75 0
Smrc3 156,553 0.0667637 0.0055916 1.882256 330 0
Smrc4 156,553 0.0557609 0.0034788 2.156562 497.859 0
Smrc5 156,553 0.0437245 0.0017181 2.086896 497.859 0
PVopl 99,072 0.1559798 0.0669715 0.5605619 109.3578 0.0000063

This table represents summary statistics for our study variables. See Appendix A for their definitions. All accounting ratios are winsorized at the 1%
level in both tails. The sample from originally drawn from Compustat for firms with a fiscal year between 1980 and 2014. Firms in financial service,
regulated industries, or public administration were filtered out of the sample as were firms with negative sales, negative operating lease obligations,
and zero cash holdings.

measure:
√̅̅̅
π
Salesvolit = |εit | (2)
2
This measure adjusts for macroeconomic and industry (fixed and time-varying) influences on the volatility of a firm’s sales. Further,
it does not introduce survival bias since it can be computed each firm-year.4 This measure is important as it captures the volatility of a
firm’s sales, which is reflected in either the degree of operating leverage or degree of financial leverage. Further, it should also reflect
the effects of product market competition emphasized in Fairhurst et al. (2021).

3.3. Measures of future operating lease obligations

Prior research (e.g., Cornaggia et al. (2013)) has used various measures of the present value of a firm’s future operating lease
obligations. However, such measures must make assumptions about the discount rate and the cash obligations past year five since
Compustat only breaks out the first five years of a firm’s future operating lease obligations (e.g., mcr1, mcr2, mcr3, mcr4, and mcr5).
These variables represent a firm’s operating lease obligation in year +1, +2, +3, +4, and + 5. To avoid making assumptions about how
a firm’s discount its future operating lease obligations, we focus on these measures in some analyses, and scale them by sales.5 We scale
by sales since these are expected period expenses. Hence, we derive the future operating lease variables: Smrc1, Smrc2, Smrc3, Smrc4,
and Smrc5.
Nevertheless, we follow the procedure in Cornaggia et al. (2013), assuming for simplicity, as they did, a constant discount rate of
10%, and then use the resultant measure, PVopl, in a robustness check on our baseline results. We deviate slightly from Cornaggia,
Franzen, and Simin’s measure and do not include the current period rental expense since we are focused on a firm’s future operating
∑ ∑6+Addyrs EMLPt
lease obligations. Specifically, using their notation, we estimate: Vopl = 5t=1 (1+K
MLPt
)t
+ t=6 (1+K )t
. We also estimated the present
d d

value of a firm’s future operating lease obligations using the method developed in Ge (2006) to examine the robustness of this
evidence.
We scale the present value of a firm’s future operating lease obligations by its total assets. We do this to make this measure similar
to our long-term debt measure, which is also scaled by total assets. Since a firm’s long-term debt presents the present value of its future
debt payments, we are treating both variables in the same way.

4
One of the concerns with using one of the standard volatility measures in the accounting or finance literature is that it employs firm data over
multiple years to compute a volatility measure, thereby, implicitly introducing survivorship bias.
5
We treat missing values as zeros when computing our aggregate statistics, but not in our regressions, to avoid biasing the aggregate statistics for
variables on which we do have data.

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D.O. Cook et al. Journal of Corporate Finance 69 (2021) 102008

4. Do a firm’s future operating lease obligations cause it to hold more cash?

To support our argument that a firm’s future operating lease obligations lead a firm to increase its cash holdings, we use the
potential outcome or counterfactual approach.6 Specifically, we first use Hainmueller’s (2012) method to produce a balanced sample
of treatment and control firms, where treatment firms in this context are firms that use operating leases. Specifically, this approach uses
entropy balancing, which is a data preprocessing method that relies on a maximum entropy reweighting scheme that calibrates unit
weights so that the reweighted treatment and control group satisfy a potentially large set of pre-specified balance conditions that
incorporate information about known sample moments. This matching results in adjusting inequalities in representation with respect
to the first, second, and possibly higher moments of the covariate distributions, thereby, reducing model dependence for the subse­
quent estimation of treatment effects, assuring that balance improves on all covariate moments included in the reweighting, and
obviating the need for continual balance checking and iterative searching over propensity score models that may stochastically balance
the covariate moments. Next, we use the implied inverse probability weights in regression models that compute the average treatment
effects.7 This combination ensures that our results are doubly robust estimates of the causal effects (e.g., Funk et al. (2011), etc.).
In Panel A of Table 2, we report statistics on the effect of balancing the control and treatment samples in a pooled cross-section.
These statistics imply that Hainmueller’s (2012) approach will produce a reasonable balancing of these groups according to their
prior total assets, market-to-book ratio, return on assets, R&D spending, use of fixed claims financing, and the 90-day Treasury bill rate.
In Panel B of Table 2, we report the average treatment effect based on regression models for both groups that incorporate the current
90-day Treasury bill rate, the firms’ use of new debt and equity financing, return on assets, R&D spending, sale of assets, and market-to-
book ratio.8 These coefficient estimates imply that a firm’s rental obligations increase its cash holdings.
To illustrate why note that a firm’s rental expenses are typically used as a proxy for its future operating lease obligations. However,
they only reflect the current period expenses. As our simple model illustrates, it is the firm’s future operating lease obligations that lead
it to hold more cash as a precaution. We identify which firms had future operating lease obligations (years t + 1, t + 2, t + 3, t + 4, and t
+ 5) and which firms did not. We then balance these two groups using Hainmueller’s (2012) approach according to their prior total
assets, market-to-book ratio, return on assets, R&D spending, use of fixed claims financing, and the 90-day Treasury bill rate. We report
the statistics on these two groups after this process in Panel C of Table 2. Then, we estimate the average treatment effects for regression
models for both groups based on the current 90-day Treasury bill rate, the firms’ use of new debt and equity financing, return on assets,
R&D spending, sale of assets, and market-to-book ratio. We report these results in Panel D of Table 2. These results imply that firms
facing future operating lease obligations will hold more cash, which is consistent with our interpretations of the evidence in Panel B of
Table 2.
While we have reported the results of pooled cross-sections in Table 2, we should note that we have also examined the robustness of
this evidence in several different ways described below and derive the same conclusions. First, we compute balancing models and
regression adjustments that differ year-by-year. Second, we use Stata’s panel data ERM procedures along with our different specifi­
cations. Third, we conduct a doubly robust analysis using firms that did not use operating leases in the prior year. We then identify
firms in this sample that took on operating lease obligations and consider them the treatment group. All of this evidence implies that
the conclusions we report in Table 2 are robust to how we conduct our doubly robust causal analysis. Therefore, we conclude that our
evidence supports our argument that a firm’s future operating lease obligations influences its cash holdings, rather than a firm’s cash
holdings influences its use of operating leases.

5. The influence of interaction between cash flow volatility and a firm’s use of debt and operating leases on its cash
holdings

While the above analyses support the direction of change from operating lease obligations to cash holdings, rather than vice versa,
it does not address the more subtle issues we raised. A textbook treatment of the effects of a firm’s degree of operating leverage and its
degree of financial leverage is that they increase the volatility of the firm’s earnings. However, they do not cause the volatility of a
firm’s earnings, rather this is due to volatility in the firm’s sales. The sales may be volatile because of competition, changes in consumer
preferences, natural disasters, etc. Consequently, under either the degree of operating leverage or degree of financial leverage con­
cepts, the effects of a firm’s future debt or operating lease obligations on its cash holdings for precautionary reasons depends on this
volatility.
Thus, the interaction between a firm’s future operating lease obligations (or its future debt payments) and its sales volatility is what
is critical to understanding the influence of these claims on a firm’s decision to hold precautionary cash balances. For example, if there
is no volatility in a firm’s gross profit margins, then the firm can be certain of what it will need to pay in the future, and these claims will
not lead it to hold more cash.9 However, if the firm faces sales volatility, then a firm’s use of debt or operating leases will increase the

6
See Pearl et al. (2016) for a simple introduction to the use of counterfactual analysis to establish causal inferences. Morgan and Winship (2015)
provide a more detailed discussion.
7
We use Stata’s “teffects ra” procedure as this adjusts the standard errors in an appropriate way.
8
We report regressions on our cash measure, Cashm2, but derive similar results using our cash measure, Cashm1. Further, we derive the same
conclusions if we use transformed versions of these measures as our dependent variables. Thus, in Table 2 we just report the regressions on these
ratios so it is easier to interpret the coefficient estimates for the average treatment effect.
9
Obviously, this breaks down when the sum of these claims exceeds its gross profit margin, but then the firm is bankrupt.

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D.O. Cook et al. Journal of Corporate Finance 69 (2021) 102008

Table 2
Analysis of firms that initiate operating lease obligations.
Panel A: Balancing on treatment (current operating lease expense > 0)

Treat Control

Mean Variance Mean Variance

Ln(total assets)(-1) 5.109 5.539 5.109 5.766

Mkt-to-book (t-1) 1.998 4.401 1.998 6.737
ROA (t-1) 0.0535 0.07939 0.0535 0.09623
R&D (t-1) 1.134 7912 1.142 2440
Fixed Claims (t-1) 0.5829 0.1432 0.5829 0.2325
TB - 3 month (t-1) 4.705 10.97 4.705 10.62

Panel B: Average treatment effect for Cashm2

Coef. Std. Err. z P>z

Current operating lease obligations 0.028032 0.00093 30.13 0.00

Panel C: Balancing on treatment (future operating lease expense > 0)

Treat Control

Mean Variance Mean Variance

Ln(total assets)(-1) 5.165 5.352 5.165 6.553

Mkt-to-book (t-1) 1.97 4.184 1.969 6.029
ROA (t-1) 0.05479 0.07551 0.05479 0.09478
R&D (t-1) 1.5 9854 1.5 1294
Fixed Claims (t-1) 0.5791 0.1361 0.5791 0.2274
TB - 3 month (t-1) 4.521 10.59 4.522 8.626

Panel D: Average treatment effect for Cashm2

Coef. Std. Err. z P>z

Future operating lease obligations 0.019886 0.001155 17.21 0.00

In this table, we report results from conducting doubly robust estimations of the effect of a firm’s current and future operating lease obligations on its
cash and marketable securities holdings. In Panels A and C we report the statistics for the firm features on which we balanced the two types of firms.
The results reported in Panels B and D are results from using Stata’s teffects ra estimation procedure to estimate the average treatment effects
associated with a firm with operating lease obligations. These regressions include controls for firm size, market-to-book ratio, debt and equity
financing, R&D expenses, return on assets, and the Treasury Bill (3 month) rate. A positive coefficient on the treatment variable indicates that it is
associated with an increase in a firm’s cash holdings.

volatility of their earnings and cash flows. These volatilities should lead a firm to hold more precautionary cash balances. Conse­
quently, it is the interaction between a firm’s future debt and operating lease obligations and sales volatility that is critical to their
effects on its cash holdings. To address this argument, we estimate equations of the following form for each of our cash measures:
( )
Cash measure = F β0 + β1 LT Debt + β2 PVopl + β3 Salesvol + β4 LT Debt*Salesvol + β5 PVopl *Salesvol + Control Variables

We report the results of estimating fixed effects regression models for our Cashm1 and Cashm2 variables using two variations of the
above specification in Table 3. Columns 2 and 3 report the results of estimating a model that starts with net income. Columns 4 and 5
report the results when we break net income into key components. All of these specifications capture the main drivers of the statement
of changes in cash flows.
Taken together, these results suggest several important implications. First, a firm’s cash holdings are negatively correlated with
short-term interest rates, and so the opportunity cost of cash holdings is correlated with the level of cash holdings. Second, a firm’s cash
holdings are negatively and significantly correlated with firm size. Because the logarithm of sales for small companies is negative,
smaller firms will hold more cash. Third, a firm’s cash holdings are positively and significantly correlated with a firm’s market-to-book
ratio. If one interprets a firm’s market-to-book ratio as capturing its growth prospects, then one can interpret firms with better growth
prospects holding more cash.
Fourth, a firm’s end-of-period cash holdings is negatively correlated with its beginning of period future debt and operating lease
obligations. These results are consistent with the evidence in Opler et al. (1999), and so many other empirical studies that report a
negative partial correlation between a firm’s use of debt and its cash holdings. To the extent the present values of these two future
obligations reflect their current amounts, then these results are consistent with our earlier point about the mechanical relationship
between current period expenses and cash balances implied by the statement of cash flows. Seen in this light, the relative size of their
coefficients is consistent with the fact that a firm’s current debt claims are typically much larger than its current operating lease claims.
More importantly for our study, we find evidence that a firm’s cash holdings are significantly and positively correlated with the
interaction between its sales volatility and the present value of its future operating lease obligations. Further, while positive, the

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D.O. Cook et al. Journal of Corporate Finance 69 (2021) 102008

Table 3
Analysis of a firm’s future operating lease obligations on its corporate cash holdings.
log(cashm1) Logit(cash_m2) log(cashm1) Logit(cash_m2)

Constant − 1.4525 − 1.4519 − 1.5160 − 1.5159

(0.00) (0.00) (0.00) (0.00)
Ln(sale) − 0.1626 − 0.1627 − 0.1468 − 0.1468
(0.00) (0.00) (0.00) (0.00)
NI/ta 0.7010 0.7012
(0.00) (0.00)
Cogs/sale − 0.0924 − 0.0922
(0.00) (0.00)
R&D 0.1085 0.1086
(0.00) (0.00)
Netwc/ta − 1.7330 − 1.7333 − 1.4015 − 1.4016
(0.00) (0.00) (0.00) (0.00)
Capx/ta − 1.7579 − 1.7586 − 1.7589 − 1.7595
(0.00) (0.00) (0.00) (0.00)
Netequity/ta 1.4860 1.4870 1.4735 1.4744
(0.00) (0.00) (0.00) (0.00)
Dividend 0.1096 0.1096 0.1181 0.1181
(0.00) (0.00) (0.00) (0.00)
Market-to-Book 0.0829 0.0829 0.0846 0.0846
(0.00) (0.00) (0.00) (0.00)
Treasury bill rate − 0.0322 − 0.0322 − 0.0292 − 0.0292
(0.00) (0.00) (0.00) (0.00)
Ln(salesvol) − 0.0097 − 0.0097 − 0.0128 − 0.0128
(0.22) (0.22) (0.13) (0.13)
LT Debt(t-1) − 0.9451 − 0.9456 − 0.9424 − 0.9428
(0.00) (0.00) (0.00) (0.00)
PVopl(t-1) − 0.4334 − 0.4335 − 0.6056 − 0.6058
(0.00) (0.00) (0.00) (0.00)
Ln(salesvol)*LT Debt(t-1) 0.0479 0.0480 0.0474 0.0475
(0.09) (0.09) (0.11) (0.11)
Ln(salesvol)*PVopl(t-1) 0.0540 0.0541 0.0574 0.0575
(0.01) (0.01) (0.01) (0.01)
Firm fixed effects Yes Yes Yes Yes
F statistics 185.76 185.95 146.21 146.32
# of firm-year observations 70,767 70,767 70,827 70,827

In this table, we regress the natural log of a firm’s cash holdings measure, Cashm1, on different regressors that include the interaction between cash
flow volatility and debt and the present value of operating lease obligations. We use a similarly specified fractional logit regression model for the cash
holdings measure, Cashm2. Appendix A describes the root explanatory variables. The standard errors are Sandwich estimators (in the first regression)
and adjusted for clustering at the firm level (both regressions). P-values associated with the null of the coefficient equaling zero are reported within
parentheses.

interaction between sales volatility and the face value of future debt obligations is not statistically significant. This evidence suggests
that conditional on its sales volatility, a firm’s future operating lease obligations exercises a greater effect on its cash holdings than its
future debt obligations.
Altogether this evidence tells a consistent story. Younger firms with greater growth prospects that invest more in R&D hold more
cash. Further, firms facing greater sales volatility and using more operating leverage in the future hold more cash. Considering the
stories told by Rampini and Viswanathan (2013) and others about how young firms with good growth prospects will use operating
leases to acquire assets, then these results are connected. To examine this conjecture further, in conjunction with the change in firm
composition story, we turn to our next examination.

6. Temporal patterns in corporate cash holdings

As noted earlier, there are two stories for the temporal increase in U.S. corporate cash holdings. While these stories are not mutually
exclusive, we are more interested in the change in firm composition story. Just saying that the composition of firms has changed does
not explain why corporate cash holdings has changed. Instead, there must be something about these firms that leads them to hold more
cash.
Srivastava (2014) argues that newer firms have become more involved in converting existing information into a new genre of
information. Srivastava identifies these firms by their SGA intensity, which is equivalent to our SGA measure. This characterization is
also consistent with those (e.g., Bates et al. (2009), etc.) that emphasize the R&D intensity of newer firms. Further, this identification
will also capture the competitive pressures story since such firms will also need to spend more on SGA to compete.
Therefore, we use a firm’s SGA intensity as a way of categorizing firms, and then examine whether their R&D intensity, sales
volatility, and operating lease use are related. To get a better sense of the changes in firm characteristics over time, we partition our
time-period into 1980 to 1990, 1990 to 2000, 2000 to 2010, and 2010 to 2014. Next, for each period, we sort firms into quartiles

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D.O. Cook et al. Journal of Corporate Finance 69 (2021) 102008

according to our SGA measure (from lowest to highest). Finally, for each of the quartiles, we compute the median Cashm1, Cashm2,
COGS, SGA, R&D expense, Salesvol, and Rental Expense. We use median values for three reasons. First, these variables are not all
normally distributed. Second, this treatment mitigates the effect of outliers. Third, this treatment illustrates specific points that are not
clear when reporting means.
Table 4 displays these results, which suggest several interesting observations. First, with in a time period, as one increases the SGA
intensity of a segment of firms, their sales volatility increases, and their use of operating leases increases. This evidence is consistent
with the implications of Rampini and Viswanathan’s (2013) model.
Second, as one looks across time periods, SGA expenses become a larger share of operating expense, sales volatility increases, and
more firms appear to engage in R&D. This evidence is consistent with the changing firm composition stories based on either their SGA
intensity or R&D intensity. Moreover, this evidence supports stories that these firms will use operating leases to acquire operating
assets as it gives me more flexibility or options.
This latter point, along with our earlier argument that the interaction between a firm’s sales volatility and its future operating lease
obligations will lead firms to hold more cash, implies that one should expect the temporal trends in corporate cash holdings and future
operating lease obligations to be co-integrated. This expectation is critical because just showing that there are differences across groups
of firms in their use of operating leases does not establish a relationship between the increased use of operating leases and the increase
in corporate cash holdings over time.
In Fig. 1, we display the annual means of corporate cash holdings, R&D expenses, the T-Bill rate, and the present value of operating
lease expenses. The R&D expense variable captures the argument that the temporal increase in R&D spending accounts for the secular
rise in corporate cash holdings (captured by cashm1). The average T-bill rate over a year captures the cost of carry argument that this
cost accounts for the temporal increase in corporate cash holdings. And finally, the present value of operating lease obligations
captures the argument that the secular increase in operating lease obligations also influences the temporal increase in corporate cash
holdings.
One implication of this graph is that these time series are nonstationary. Further, this graph suggests that cash holdings, R&D
spending, and the present value of operating lease obligations are co-integrated time series. To test these ideas, we scale cash holdings
by total assets, R&D spending by sales, and the firm’s next year’s operating lease obligations by total assets. We then use a Dickey-
Fuller augmented unit root test to test whether each of these series is nonstationary. We fail to reject that the mean scaled cash
holdings, R&D spending, next year operating lease obligations, and T-bill rates are nonstationary processes.

Table 4
Temporal patterns in cash holdings and selected firm features differentiated by Selling and General Administrative Expense.
Panel A: Median values for key variables by SGA quartile rank for 1980 to 1990

Count Cashm1 Cashm2 COGS SGA R&D expense Salesvol Rental expense

1 SGA Q 10,266 0.0424 0.0407 0.8079 0.0890 0 0.1674 0.0108

2 SGA Q 10,266 0.0480 0.0458 0.7262 0.1784 0 0.1726 0.0128
3 SGA Q 10,266 0.0581 0.0549 0.6351 0.2699 0 0.1677 0.0183
4 SGA Q 10,266 0.0997 0.0907 0.4958 0.4842 0.0231 0.1791 0.0332

Panel B: Median values for key variables by SGA quartile rank for 1990 to 2000

Count Cashm1 Cashm2 COGS SGA R&D expense Salesvol Rental expense

1 SGA Q 12,082 0.0290 0.0282 0.8025 0.0820 0 0.1590 0.0105

2 SGA Q 12,081 0.0360 0.0347 0.7172 0.1823 0 0.1719 0.0130
3 SGA Q 12,082 0.0579 0.0548 0.6049 0.2937 0 0.1792 0.0179
4 SGA Q 12,081 0.1537 0.1333 0.4696 0.5703 0.0755 0.2050 0.0350

Panel C: Median values for key variables by SGA quartile rank for 2000 to 2010

Count Cashm1 Cashm2 COGS SGA R&D expense Salesvol l Rental expense

1 SGA Q 9917 0.0379 0.0366 0.8075 0.0740 0 0.1956 0.0098

2 SGA Q 9917 0.0514 0.0489 0.7094 0.1765 0 0.1835 0.0121
3 SGA Q 9917 0.0839 0.0774 0.5803 0.3114 0 0.1924 0.0185
4 SGA Q 9916 0.2582 0.2053 0.4341 0.7013 0.1250 0.2783 0.0360

Panel D: Median values for key variables by SGA quartile rank for 2010 to 2014

Count Cashm1 Cashm2 COGS SGA R&D expense Salesvol Rental expense

1 SGA Q 9917 0.0578 0.0547 0.8041 0.0649 0 0.1490 0.0075

2 SGA Q 9917 0.0750 0.0697 0.7115 0.1558 0 0.1395 0.0106
3 SGA Q 9917 0.1070 0.0967 0.5790 0.2902 0.0047 0.1459 0.0148
4 SGA Q 9916 0.2350 0.1903 0.4138 0.6688 0.0943 0.2265 0.0275

Below we present tables that report the mean values of our two cash holding measures and the proportion of a firm’s sales accounted for by their SGA
expense, R&D expense, and its rental or operating lease during different time periods. These tables reflect the distinctions between types of firms and
decades reported in Srivastava (2014).

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D.O. Cook et al. Journal of Corporate Finance 69 (2021) 102008

Fig. 1. Time series of means across firms.

The graph displays the time series means across firms of corporate cash holdings ($M), R&D spending ($M), 90 day T-bill rate, and the present value
of operating leases ($M). abs.

Next, we test whether these series are I(1) processes. For this, we take the first difference of each of these time series and test
whether they are nonstationary. Using the Dickey-Fuller test, we reject each of their first differences as being nonstationary processes,
and so we can treat them as integrated of order 1.
Given this evidence, we can now test whether these series are co-integrated. For this purpose, we follow the Engle-Granger two-step
co-integration test. First, we regress the mean scaled R&D spending, mean T-bill rate, mean scaled next year’s operating lease on a
firm’s scaled cash holdings, and report the results in column 2 of Table 5. We then test whether the residuals are stationary using the
augmented Dickey-Fuller test. With a test statistic of − 3.433, we reject that they are nonstationary at the 5% marginal significance
level. Thus, this evidence suggests that a firm’s cash holdings are co-integrated with its R&D spending, future operating lease obli­
gations, and short-term interest rates.

Table 5
Analysis of the co-integration of average corporate cash holdings with average R&D spending, average T-bill rates, and average operating lease
obligations over different horizons.
Mean Mean Mean Mean Mean Mean

Cashm1 Cashm1 Cashm1 Cashm1 Cashm1 Cashm1

Mean R&D/Sale 0.813 0.845 0.913 0.958 0.952 0.865

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Mean T-bill rate − 0.00399 − 0.00416 − 0.00413 − 0.00406 − 0.00421 − 0.0002
(0.05) (0.04) (0.05) (0.09) (0.09) (0.76)
Mean Smrc1 0.253
(0.03)
Mean Smrc2 0.263
(0.04)
Mean Smrc3 0.162
(0.05)
Mean Smrc4 0.0661
(0.72)
Mean Smrc5 0.0968
(0.65)
Ln(Mean PVopl) 0.0176
(0.00)
Constant 0.157 0.156 0.156 0.155 0.157 0.029
(0.00) (0.00) (0.00) (0.00) (0.00) (0.31)
N 36 36 36 36 36 36
R-sq 0.92 0.92 0.91 0.91 0.91 0.89
F 162.2 162.7 152.5 154.2 157.5 100.31
Dicky-Fuller test on residuals − 3.433 − 3.262 − 3.244 − 3.389 − 3.453 − 3.779
MacKinnon approximate p value 0.00 0.00 0.00 0.00 0.00 0.00

In this table, we are reporting the results of using the Engle-Granger two step test for co-integration. First, we regress the means by year of our
corporate cash measure, cashm1, R&D sales, the T-bill rate, and the future operating lease obligations. We report P-values associated with the null
hypothesis that the coefficient is zero within parentheses and use Sandwich estimators of the standard errors. Second, we extract the residuals from
each regression and test them for non-stationarity using the augmented Dicky-Fuller test statistics.

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D.O. Cook et al. Journal of Corporate Finance 69 (2021) 102008

So, while increases in the use of operating leases is not the root cause of the temporal increase in corporate cash holdings, this
increase is an important contributor to the increase in corporate cash holdings in a way that is consistent with a relationship between
increases in the degree of operating leverage and precautionary cash balances, conditional on a firm’s sales volatility. This relationship
may help to explain the evidence in (Saibene, 2019).

7. Summary and conclusions

We address two questions in this study unaddressed in prior research. What is the effect of a firm’s future operating lease obli­
gations on its current cash holdings? Does the temporal increase in operating lease obligations help to explain the temporal increase in
U.S. corporate cash holdings?
Using data on U.S. corporations between 1980 and 2014, and we find significant evidence for the following conclusions. First, we
use a double robust counterfactual framework to support our causal argument that a firm’s future operating lease obligations will lead
it to increase its cash holdings. Second, the interaction between a firm’s sales volatility and the present value of its future operating
lease obligations is a significantly positive influence on its cash holdings. Third, firms that are more SGA intensive and R&D intensive
face sales volatility and use more operating leases to acquire assets. Fourth, the trend in average U.S. corporate cash holdings is
cointegrated with the average present value of future operating lease obligations of U.S. corporations.
Altogether, we interpret our evidence as implying three important ideas. First, a firm’s future operating lease obligations, con­
ditional on its sales volatility, significantly influence its current cash holdings. Second, conditional on the volatility of a firm’s sales, the
firm’s future operating lease obligations exercise a more significant influence on its current cash holdings than does its future debt
obligations. Third, consistent with Rampini and Viswanathan (2013) and the firm composition story, growing firms facing high sales
volatility and use operating leases to acquire assets. Consequently, the increased use of operating leases has contributed to the tem­
poral increase in corporate cash holdings.

Appendix A. Variable definitions

Variable Definition

Cashm1 che/(at-che)
Cashm2 che/at
Ln(sale) Ln(sale)
NI/ta ni/at
Cogs/sale cogs/sale
SGA xsga/sale
Netwc/ta ((act-che) – lct)/at
Capx/ta capx/at
R&D xrd/sale with xrd =0 if xrd is missing
Dividend 1 if dvc >0, 0 otherwise
Netequityy/ta (sstk-prstkc)/at
Market-to-book (at – ceq + (csho*prcc_f))/at
Salesvol Firm-specific measure of the volatility of sales using residuals from regression on ((sales – L.sales)/at) following DeVeirman and Levin (2011).
LTdebt Dltt/at (total long-term debt /total assets)
Treasury bill 90 day T bill rate from FRED database on fiscal year end
rate
Smrci mrci/sale, for i = 1,..,5
PVopl Present value of a firm’s operating leases similar to Cornaggia et al. (2013), except that it only uses future operating lease commitments, divided
by total assets
Note: Compustat variable mneumonics are provided in parentheses. All accounting ratios were winsorized at the 1% level.

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