Leased capital and the investment-q relation

Kai Li and Linqing You

Journal of Corporate Finance, 2023, vol. 80, issue C

Abstract: Leased capital accounts for a large fraction of U.S. public firms’ total productive physical capital. In this paper, we extend the neoclassical investment q theory with financial frictions by explicitly considering firms’ option to lease. Our model features firms’ optimal buy-versus-lease decisions with collateral constraints and monitoring costs, and gives a strong implication that measured Tobin’s Q has to be adjusted by leased capital. Empirically, we use our model as guidance to construct the lease-adjusted Tobin’s Q, consistent with the recent leasing accounting change (ASC 842). We show that our lease-adjusted Tobin’s Q is a superior proxy for investment opportunities, especially for firms that rent more capital.

Keywords: Investment q theory; Leased capital; Financial frictions (search for similar items in EconPapers)
JEL-codes: E22 E23 G31 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:80:y:2023:i:c:s0929119923000032

DOI: 10.1016/j.jcorpfin.2023.102354

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