An economic analysis of leasebacks |
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Authors: | Puneet Handa |
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Institution: | (1) Wharton School, University of Pennsylvania, 19104-6302 Philadelphia, PA;(2) Stern School of Business, New York University, 90 Trinity Place, 10006 New York, NY |
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Abstract: | Leaseback decisions by firms involve the simultaneous sale of an asset and a lease agreement with the new owner. Examination
of 64 leaseback decisions made by firms during 1979–1987 reveals a significant negative announcement effect. We present a
theoretical framework in which all firms prefer to leaseback when there is symmetric information. When there is asymmetry
of information between the manager and the market, however, firms with favorable prospects prefer to own the asset. Firms
with poor prospects choose to leaseback and capture the associated depreciation tax shield through the sale. Our empirical
results indicate that, besides the significant negative announcement effect, firms proposing a leaseback earn negative returns
in the three months prior to the announcement. We monitor the performance of these firms for five years after the leaseback
decision and compare it to five years before the announcement. There is a significant drop in operating performance as indicated
by several key variables such as operating earnings before depreciation and pretax earnings. This is consistent with the hypothesis
that firms choose to leaseback when faced with unfavorable future prospects.
I would like to thank S.P. Kothari, Cheng-few Lee, Scott Linn, Mike Rozeff, Ramasastry Ambarisha, and an anonymous referee
for their comments and suggestions. The usual disclaimer applies. |
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Keywords: | leaseback decisions announcement effects information effects |
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