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Tournament-based incentives and the lease-versus-buy decision

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  • Rahman, Shofiqur
  • Chowdhury, Hasibul

Abstract

This paper investigates the effect of firms’ tournament-based incentives (TI) on leasing. Measuring TI as the pay gap between the chief executive officer (CEO) and non-CEO executives, we find that firms with higher TI have a higher propensity to lease than purchase assets. Cross-sectional analyses suggest that this positive association is stronger for firms with high information asymmetry, low creditworthiness, and high cash-flow uncertainty. Consistent with “financial contracting” motivations of the lease suggested by Smith and Wakeman (1985), our findings indicate that, when risky corporate activities induced by TI lead to an increased agency cost of debt, leasing could more likely be used to economize on the costly external finances.

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  • Rahman, Shofiqur & Chowdhury, Hasibul, 2023. "Tournament-based incentives and the lease-versus-buy decision," Journal of Banking & Finance, Elsevier, vol. 148(C).
    • Handle: RePEc:eee:jbfina:v:148:y:2023:i:c:s0378426622003107
    DOI: 10.1016/j.jbankfin.2022.106730
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    More about this item

    Keywords

    Tournament incentives; Leasing; Secured debt;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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