The Term Structure of Lease Rates with Endogenous Default Triggers and Tenant Capital Structure: Theory and Evidence

39 Pages Posted: 25 May 2009

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Brent W. Ambrose

Pennsylvania State University

Henry Hongren Huang

National Central University at Taiwan

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

Date Written: February 26, 2009

Abstract

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

Agarwal, Sumit and Ambrose, Brent W. and Huang, Henry Hongren and Yildirim, Yildiray, The Term Structure of Lease Rates with Endogenous Default Triggers and Tenant Capital Structure: Theory and Evidence (February 26, 2009). Available at SSRN: https://ssrn.com/abstract=1409129 or http://dx.doi.org/10.2139/ssrn.1409129

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Brent W. Ambrose

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)

Henry Hongren Huang

National Central University at Taiwan ( email )

No. 300, Zhongda Road
Chung-Li Taiwan, 32054
Taiwan

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

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