Leasing as a Risk-Sharing Mechanism
63 Pages Posted: 15 Jul 2019
Date Written: July 1, 2019
This paper argues 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. 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 it the negative leased capital premium. We develop a general equilibrium model with heterogeneous firms and financial frictions to quantify this channel. Our study also provides a caveat to the recent leasing accounting change of IFRS 16: lease induced liability and financial debt should not be treated equally on firms' balance sheet, as their implications for firms' equity risks and cost of equity are opposite.
Keywords: Leased capital, Operating lease, Risk Sharing, Collateral, Financial constraint, Cross-section of returns
JEL Classification: E2, E3, G12
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