The Leased Capital Premium
Speaker: Dr. Kai Li (Hong Kong University of Science and Technology)
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Topic: |
The Leased Capital Premium |
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Time&Date: |
1:00-2:15 pm, 2018/11/23 (Friday |
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Venue: |
Room 619, Teaching A |
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Speaker: |
Dr. Kai Li (Hong Kong University of Science and Technology) |
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| Abstract: | This paper argues that lease-induced leverage has an opposite implication for firms’ equity risks to secured debt based financial leverage. In a typical operating lease contract, the lessee, who borrows the capital, effectively obtains an insurance against the risk of capital price fluctuations from the lessor, who owns the capital and bears such a risk. Hence our theory predicts that the leased capital is less risky than the owned capital from lessee firms’ perspective. We provide strong empirical evidence to support this prediction. Among financially constrained stocks, firms with a low leased capital ratio earn average returns that are 7.14% higher than firms with a high leased capital ratio. We develop a general equilibrium model with heterogenous firms and financial frictions to quantitatively account for the negative leased capital premium. |
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