Lease Valuation When Taxable Earnings Are a Scarce Resource

  • Author(s): JULIAN R. FRANKS, STEWART D. HODGES
  • Published: Apr 30, 2012
  • Pages: 987-1005
  • DOI: 10.1111/j.1540-6261.1987.tb03923.x

ABSTRACT

In this paper, we examine leasing as a tax‐arbitrage instrument. Analysis of a sample of UK leases presented in this paper suggests that lessors earn large positive NPVs. Our theoretical model seeks to explain these positive NPVs in terms of a market price for a scarce resource that we identify as scarce taxable earnings. Using these prices, the model permits a lessor to determine 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. There may be two reasons why an initial portfolio of contracts may be suboptimal. Either there may be clienteles or the leasing market may be inefficient. Subsequently, we discuss reasons why the leasing market may be characterized by clienteles, and, using two different samples of leases, we test whether the leasing market is segmented and efficient.

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