Capital structure and the substitutability versus complementarity nature of leases and debt

Brent William Ambrose, Thomas Emmerling, Henry H. Huang, Yildiray Yildirim

Research output: Contribution to journalArticle

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.

Original languageEnglish (US)
Article numberrfy004
Pages (from-to)659-695
Number of pages37
JournalReview of Finance
Volume23
Issue number3
DOIs
StatePublished - May 1 2019

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Capital structure
Debt
Substitutability
Lease
Complementarity
Counterparty risk
Firm value
Credit risk
Term structure

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Ambrose, Brent William ; Emmerling, Thomas ; Huang, Henry H. ; Yildirim, Yildiray. / Capital structure and the substitutability versus complementarity nature of leases and debt. In: Review of Finance. 2019 ; Vol. 23, No. 3. pp. 659-695.
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Capital structure and the substitutability versus complementarity nature of leases and debt. / Ambrose, Brent William; Emmerling, Thomas; Huang, Henry H.; Yildirim, Yildiray.

In: Review of Finance, Vol. 23, No. 3, rfy004, 01.05.2019, p. 659-695.

Research output: Contribution to journalArticle

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