Leasing as a Risk-Sharing Mechanism

92 Pages Posted: 10 Jul 2019 Last revised: 19 May 2022

See all articles by Kai Li

Kai Li

Peking University HSBC Business School

Chi-Yang Tsou

The University of Manchester - Alliance Manchester Business School

Date Written: July 1, 2019

Abstract

This paper argues that leasing is a risk-sharing mechanism: risk-tolerant lessors (capital owners) provide insurance to financially constrained risk-averse lessees (capital borrowers) against systematic capital price fluctuations. We provide strong empirical evidence to support this novel risk premium channel from the cross-section of stock returns. Among financially constrained stocks, firms with a high leased capital ratio earn average returns 7.35% lower than firms with a low leased capital ratio, which we call the negative leased capital premium. We develop a general equilibrium model with heterogeneous firms, financial frictions, and an explicit buy versus lease decision to quantify this channel.

Keywords: Leased capital, Operating lease, Risk Sharing, Collateral, Financial constraint, Cross-section of returns

JEL Classification: E2, E3, G12

Suggested Citation

Li, Kai and Tsou, Chi-Yang, Leasing as a Risk-Sharing Mechanism (July 1, 2019). Available at SSRN: https://ssrn.com/abstract=3416247 or http://dx.doi.org/10.2139/ssrn.3416247

Kai Li (Contact Author)

Peking University HSBC Business School ( email )

+86 755 26032023 (Phone)

HOME PAGE: http://sites.google.com/site/kailiwebpage

Chi-Yang Tsou

The University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
782
Abstract Views
3,109
Rank
55,778
PlumX Metrics