A Theory of Durable Asset Leasing

42 Pages Posted: 11 Dec 2022 Last revised: 1 Nov 2023

See all articles by Soon Hyeok Choi

Soon Hyeok Choi

Rochester Institute of Technology (RIT) - Saunders College of Business

Crocker Herbert Liu

Cornell University - School of Hotel Administration

Date Written: December 4, 2022

Abstract

Firms acquiring durable assets face a lease-or-purchase decision. The collateral channel narrative argues that durability can facilitate (hinder) purchases by enhancing pledgeability (requiring large down payment). Prior research hasn't recognized that some durable assets (e.g. property) can appreciate at a rate that exceeds operational income growth. It also doesn't endogenize a firm's decision to lease assets. We explicitly factor these into a firm's optimal financing and investment decision. A financially constrained firm purchases durable assets expecting to benefit from a profitable resale. If leasing is feasible, it reverts to renting if its down payment becomes burdensome.

Keywords: Durable Asset, Leasing, Collateral Channel, Real Estate

JEL Classification: D25, E22, G11, G31

Suggested Citation

Choi, Soon Hyeok and Liu, Crocker Herbert, A Theory of Durable Asset Leasing (December 4, 2022). Available at SSRN: https://ssrn.com/abstract=4293257 or http://dx.doi.org/10.2139/ssrn.4293257

Soon Hyeok Choi (Contact Author)

Rochester Institute of Technology (RIT) - Saunders College of Business ( email )

105 Lomb Memorial Dr.
Rochester, NY 14623
United States

Crocker Herbert Liu

Cornell University - School of Hotel Administration ( email )

435B Statler Hall
Ithaca, NY 14853-6902
United States

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