Leasing as a Risk-Sharing Mechanism

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