Leasing as a Risk-Sharing Mechanism

70 Pages Posted: 15 Jul 2019 Last revised: 27 Oct 2020

See all articles by Kai Li

Kai Li

Peking University HSBC Business School

Chi-Yang Tsou

University of Manchester - Alliance Manchester Business School

Date Written: July 1, 2019

Abstract

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

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

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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