Lease Valuation When Taxable Earnings Are a Scarce Resource

Julian R Franks and Stewart D Hodges

Journal of Finance, 1987, vol. 42, issue 4, 987-1005

Abstract: The authors examine leasing as a tax-arbitrage instrument. The theoretical model explains these positive NPVs in terms of a ma rket price for a scarce resource that they identify as scarce taxable earnings. Using these prices, the model permits a lessor to determin e whether the profitability of a proposed set of lease contracts can be improved by writing a different set of contracts that makes better use of the lessor's taxable earnings. Subsequently, the authors disc uss why the leasing market may be characterized by clientele, and, us ing two different samples of leases, they test whether the leasing ma rket is segmented and efficient. Copyright 1987 by American Finance Association.

Date: 1987
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