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Capital Structure and the Substitutability versus Complementarity Nature of Leases and Debt

Author

Listed:
  • Brent W Ambrose
  • Thomas Emmerling
  • Henry H Huang
  • Yildiray Yildirim

Abstract

The capital structure irrelevance argument of Modigliani and Miller (1958) implies that the use of debt or leases should have no impact on firm values. This classical argument leaves out several important considerations crucial for the result, in particular, counterparty credit risk. We re-examine the capital structure problem for firms that can utilize debt and leases in the presence of counterparty risk. Our numerical and empirical estimates show a negative term structure of lease rates that steepens as a function of counterparty risk. Moreover, we document numerical evidence for the complementary relationship between debt and leases in the presence of counterparty risk.

Suggested Citation

  • Brent W Ambrose & Thomas Emmerling & Henry H Huang & Yildiray Yildirim, 2019. "Capital Structure and the Substitutability versus Complementarity Nature of Leases and Debt," Review of Finance, European Finance Association, vol. 23(3), pages 659-695.
    • Handle: RePEc:oup:revfin:v:23:y:2019:i:3:p:659-695.
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    File URL: http://hdl.handle.net/10.1093/rof/rfy004
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    Cited by:

    1. Cook, Douglas O. & Kieschnick, Robert & Moussawi, Rabih, 2021. "Operating lease obligations and corporate cash management," Journal of Corporate Finance, Elsevier, vol. 69(C).

    More about this item

    Keywords

    Leasing valuation; Credit risk; Endogenous default;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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