Tournament-based incentives and the lease-versus-buy decision

Shofiqur Rahman and Hasibul Chowdhury

Journal of Banking & Finance, 2023, vol. 148, issue C

Abstract: This paper investigates the effect of firms’ tournament-based incentives (TI) on leasing. Measuring TI as the pay gap between the chief executive officer (CEO) and non-CEO executives, we find that firms with higher TI have a higher propensity to lease than purchase assets. Cross-sectional analyses suggest that this positive association is stronger for firms with high information asymmetry, low creditworthiness, and high cash-flow uncertainty. Consistent with “financial contracting” motivations of the lease suggested by Smith and Wakeman (1985), our findings indicate that, when risky corporate activities induced by TI lead to an increased agency cost of debt, leasing could more likely be used to economize on the costly external finances.

Keywords: Tournament incentives; Leasing; Secured debt (search for similar items in EconPapers)
JEL-codes: G30 G32 J33 M52 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:148:y:2023:i:c:s0378426622003107

DOI: 10.1016/j.jbankfin.2022.106730

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