Are All Durable Assets Created Equal? The Impact of Price Appreciation on Investment

109 Pages Posted: 11 Dec 2022 Last revised: 23 Dec 2022

See all articles by Soon Hyeok Choi

Soon Hyeok Choi

Cornell University - SC Johnson College of Business

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, Are All Durable Assets Created Equal? The Impact of Price Appreciation on Investment (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)

Cornell University - SC Johnson College of Business ( email )

The Nolan School of Hotel Administration
Statler Hall
Ithaca, NY 14850
United States

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