Are All Durable Assets Created Equal? The Impact of Price Appreciation on Investment
109 Pages Posted: 11 Dec 2022 Last revised: 23 Dec 2022
Date Written: December 4, 2022
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: Suggested Citation