Does Geopolitical Risk Affect Firms' Leasing Policy?

Abstract

We document a robustly positive association between corporate leasing and geopolitical risk (GPR). This relation is stronger in cases where firms have greater earnings and returns volatility, face more severe product market competition, are more financially constrained, and are subject to more investment irreversibility. The impact of geopolitical risk is particularly relevant for short-term leases. Leasing during times of heightened GPR is associated with larger sales growth and higher firm value. Overall, our results are consistent with predictions of real options theory, where firms strategically use leasing as a mechanism to create flexibility in ongoing operations when facing uncertainty.

Keywords: leasing, real options, flexibility, corporate investments, Geopolitical risk

JEL Classification: D25, G32, H56, M21