Asset Liquidity and Financial Contracts: Evidence from Aircraft Leases

Abstract

This paper empirically examines the way in which asset liquidity affects lease contracts. Financial contracting theories agree that more-liquid assets decrease the expected cost of external financing, thus making leasing more attractive and reducing lessors' equilibrium return. However, the literature has ambiguous predictions on the effect of liquidity on the maturity of leases. These predictions are further complicated by the existence of two types of lease contracts - operating and capital - that differ in whether asset ownership transfers to the lessee at the end of the contract. Using data from commercial aircraft, we find that more-liquid assets 1) make leasing, operating leasing in particular, more likely; 2) have shorter operating leases; 3) have longer capital leases; and 4) command lower markups of operating lease rates.

Keywords: leasing, aircraft

JEL Classification: G32, L14, L93