Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice

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ANSWERS TO CHAPTER DISCUSSION QUESTIONS 469

2. Although the academic literature assumes that the marginal investor is rational,

behavioral research shows that this may not be the case. Also, debt covenants

may not cover all contingencies. Thus, using an SLB to meet contractual obliga-

tions may be an optimal decision depending on the contractual language of the

debt covenants.

3. In a recessionary environment, capital constraints may be high, even if the cost of

capital is low. The demand for funds will increase. For this reason, an increase in

alternative forms of financing such as SLBs may arise. However, the demand for

these assets might decrease when opportunity costs are low and rates of returns

fall. Even though demand from the seller/lessees may increase, the supply from

buyers/lessors may decrease. The seller may be forced to discount the value

of the asset and accept stringent leasing terms to incentivize a buyer to take

the risk.

4. A substantial portion of third-party buyers/lessors are real estate holding com-

panies or leasing agencies that are in the business of leasing assets. The market

may perceive the transaction as a regular action of the business and thus not

lead to abnormal increases or decreases in stock price. Competition may pre-

clude lessors from charging lessees any more than the minimum required rate of

return for a specific transaction so the lessor would not enjoy an excess return. ...