Leasing as a Mitigation Channel of Capital Misallocation

36 Pages Posted: 2 Dec 2020

See all articles by Kai Li

Kai Li

Peking University HSBC Business School

Yiming Xu

affiliation not provided to SSRN

Date Written: October 15, 2020

Abstract

We document that leased capital accounts for about 20% of the total productive physical assets used by U.S. public listed firms, and this proportion is even higher among small and financially constrained firms - over 40%. However, operating lease has been recorded as an off-balance-sheet item until the recent IFRS 16 lease accounting rule change (effective from 1 January 2019). Therefore, leased capital is an important ''unmeasured'' capital which leads to a significant mis-measurement in firms' capital productivity, and in quantifying capital misallocation (Hsieh and Klenow, 2009). In this paper, we argue that leasing is an important mitigation channel of credit-constraint-induced capital misallocation. First, we develop a general equilibrium model with heterogeneous firms, collateral constraint and an explicit buy versus lease decision to demonstrate a novel economic mechanism: the possibility for firms to rent capital when they are financially constrained mitigates capital misallocation. Second, we empirically show that ignoring leased capital and its mitigation effect leads to a significant overestimate of capital misallocation.

Keywords: Leased capital, Collateral Constraint, Capital misallocation

JEL Classification: E2, E3, G12

Suggested Citation

Li, Kai and Xu, Yiming, Leasing as a Mitigation Channel of Capital Misallocation (October 15, 2020). Available at SSRN: https://ssrn.com/abstract=3719658 or http://dx.doi.org/10.2139/ssrn.3719658

Kai Li (Contact Author)

Peking University HSBC Business School ( email )

+86 755 26032023 (Phone)

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

Yiming Xu

affiliation not provided to SSRN

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