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Continuous-Time Convertible Lease Pricing and Firm Value

Author

Listed:
  • Ons Triki

    (University of Sfax)

  • Fathi Abid

    (University of Sfax)

Abstract

The objective of this paper is to ensure the firm’s financial stability and recover the counterparties’ losses to the lease in case of default. The paper examines the term structure of the lease rates considering the credit default risk and the firm’s capital structure. The link between lessee credit risk and lease rate is addressed to explore the impact of convertible lease financing on the term structure of the lease rate, the optimal leverage ratio, the cumulative default probability, and the optimal firm value. The interaction between the lessee’s capital structure and the equilibrium lease rate has been assessed using a competitive lease market argument and endogenous structural default model. The paper evaluates the convertible lease and its equilibrium lease rate assuming that the service flow of the leased asset follows a geometric Brownian motion. The results of the numerical analyses reveal that the lessee’s cumulative probability of default increases with the lease maturity. The term structure of the lease rate is an increasing function of the risk-adjusted market price level. The presence of the convertible lease in the financial structure rises the company’s value. The paper determines closed-form solutions of the firm’s assets and specifies an endogenous default threshold by considering the firm’s optimal capital structure in a continuous time stochastic universe.

Suggested Citation

  • Ons Triki & Fathi Abid, 2025. "Continuous-Time Convertible Lease Pricing and Firm Value," Computational Economics, Springer;Society for Computational Economics, vol. 66(4), pages 2645-2674, October.
    • Handle: RePEc:kap:compec:v:66:y:2025:i:4:d:10.1007_s10614-024-10753-8
    DOI: 10.1007/s10614-024-10753-8
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    References listed on IDEAS

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    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
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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