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The Leased Capital Premium

  • 2018.11.16
  • Event
Speaker: Dr. Kai Li (Hong Kong University of Science and Technology)

Topic:

The Leased Capital Premium

?

Time&Date:?

? ? 1:00-2:15 pm, 2018/11/23 (Friday

Venue:

? Room 619, Teaching A

Speaker:

? Dr. Kai Li (Hong Kong University of Science and Technology)

Abstract: This paper argues that lease-induced leverage has an opposite implication for ?rms’ equity risks to secured debt based ?nancial leverage. In a typical operating lease contract, the lessee, who borrows the capital, e?ectively obtains an insurance against the risk of capital price ?uctuations 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 ?rms’ perspective. We provide strong empirical evidence to support this prediction. Among ?nancially constrained stocks, ?rms with a low leased capital ratio earn average returns that are 7.14% higher than ?rms with a high leased capital ratio. We develop a general equilibrium model with heterogenous ?rms and ?nancial frictions to quantitatively account for the negative leased capital premium.

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