Managers will often have strong incentives to favour operating leases over finance leases.This is because:

Question

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Finance leases are recorded on the balance sheet, which increases the debt ratio and lowers the return on total assets. This accounting treatment can make a company's financial health appear weaker, hence managers might prefer operating leases, which are not recorded on the balance sheet in the same way, to keep the debt ratio lower and return on total assets higher.

Managers Will Often Have Strong Incentives to Favour Operating Leases