We found a match
Your institution may have rights to this item. Sign in to continue.
- Title
Leases with Purchase Options and Double Moral Hazard.
- Authors
Chau, Derek K.Y.; Firth, Michael; Srinidhi, Bin
- Abstract
The purpose of this paper is to explain why leases have a purchase option and how the exercise price of this option is determined. We follow Demski and Sappington's (1991) approach by using a double moral hazard setting. One limitation of their model is that the agent has unlimited liability. The agent has to have enough wealth and the obligation to buy the firm when the principal decides to exercise the put option. In our paper, this problem is resolved by using a call option, which is a feature of many lease contracts. We show that leases with a purchase option can completely resolve the double moral hazard problem even if all the variables in the model are unverifiable. It is the threat of being the residual claimant that induces the lessor to provide an efficient level of effort. On the other hand, it is the opportunity of being the residual claimant that induces the lessee to maintain the asset efficiently. Finally, the model predicts that certain leased assets are not properly accounted for under the current accounting standards for leasing.
- Subjects
LEASES; PURCHASE options; CONTRACTS; MORAL hazard; RISK management in business; PURCHASING; LEASE &; rental services; TAX incentives; OPTIONS (Finance); ACCOUNTING standards
- Publication
Journal of Business Finance & Accounting, 2006, Vol 33, Issue 9/10, p1390
- ISSN
0306-686X
- Publication type
Article
- DOI
10.1111/j.1468-5957.2006.00606.x