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

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472 Answers to Chapter Discussion Questions

aircraft are not subject to automatic stay, and lessors can foreclose an aircraft if

the lessee fails to make lease payments within 60 days.

3. Smith and Wakeman (1985) note that the biggest strength of the tax-based mod-

els is that provisions in the tax code are important in explaining the fact that for

some assets, leases are offered both by manufacturers and third-party lessors.

Tax-based models are also important in estimating lease payments that would

make the NPV of leasing equal to zero in equilibrium.

But the tax-based models cannot explain the maturity structure of leases.

Nor can these models explain why small firms resort to leasing much more than

large firms and why certain industries and assets (such as trucking and aircraft)

are more amenable to leasing.

4. The nontax models examine the effects of contracting costs, agency costs, liquid-

ity, and information asymmetry. The fact that the nontax models capture many

aspects of reality (that are not captured by the tax-based models) is their biggest

strength. The nontax models can explain many observed facts about leasing that

are not explained by the tax-based models. For example, Chemmanur, Jiao, and

Yan (2010) show that various contractual provisions, such as short-term versus

long-term leases with noncancellation clauses, option to buy at lease termina-

tion, and service leases, emerge as equilibrium ...