The Term Structure of Lease Rates with Endogenous Default Triggers and Tenant Capital Structure: Theory and Evidence
39 Pages Posted: 25 May 2009
Date Written: February 26, 2009
This paper focuses on the defaultable lease rate term structure with endogenous default. We combine the competitive lease market argument proposed by Grenadier (1996) and the endogenous default structural model proposed by Leland and Toft (1996) to examine the interaction between lessee's captial structure and the equilibrium lease rate. Under this framework, determining the lease rate is a simultaneous equation problem that captures the tradeo® between debt and lease financing. Using data on 2,482 real estate lease transactions, we empirically confirm the predictions derived from the numerical analysis of the model.
Keywords: leasing valuation, credit risk, endogenous default
JEL Classification: G1, G2
Suggested Citation: Suggested Citation