Enrico Moretto and Giulio Tagliavini
The purpose of this paper is to investigate how asset risk (i.e. the risk that the value of the leased asset loses unexpectedly most of its value at the end of the contract) is…
Abstract
Purpose
The purpose of this paper is to investigate how asset risk (i.e. the risk that the value of the leased asset loses unexpectedly most of its value at the end of the contract) is measured and hedged.
Design/methodology/approach
The evaluation of the lease contract is achieved by applying the theory of option pricing as the lessor is the writer of a call option on the leased asset. A sensitivity analysis on some parameters is performed.
Findings
The paper disentangles the components of the profit of a lease contract and allows to choose the optimal final purchase price. This lets the lessor hedge against asset risk.
Research limitations/implications
The paper's result can be extended by considering more complex options (such as American or exotic ones) into the lease contract.
Practical implications
Results in the paper allow for a more flexible and efficient management of lease contracts where both parties benefit under an economic and a financial point of view.
Originality/value
This is believed to be the first paper that applies derivative evaluation to the analysis of lease contracts.
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Massimo Regalli and Giulio Tagliavini
The evaluation of the after tax cost of leasing is rather complex and financial operators often fail to emphasise the cost/benefit balance. We propose an analytical formula for…
Abstract
The evaluation of the after tax cost of leasing is rather complex and financial operators often fail to emphasise the cost/benefit balance. We propose an analytical formula for the direct calculation of the true cost of leasing which does not involve the study of cash flows. Our discussion concerns the situation that we know best, the Italian case, which can easily be used more generally.
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Franco Fiordelisi and Stefano Monferrà
The purpose of this paper is to analyse the creation of shareholder value (SHV) created by non‐depository financial institutions and, especially, by leasing and factoring (L&F…
Abstract
Purpose
The purpose of this paper is to analyse the creation of shareholder value (SHV) created by non‐depository financial institutions and, especially, by leasing and factoring (L&F) companies.
Design/methodology/approach
The cost of capital of both L&F companies is estimated using an accounting procedure and, next, the economic value added (EVA) created by Italian L&F companies over the period 2002‐2004 is estimated.
Findings
L&F companies display high profitability and EVA levels over the period analysed: a very large part of leasing and factoring companies achieved a positive EVA and the lowest median level of EVA created is at least 11 per cent of capital invested in the company, while at least 50 per cent of leasing companies achieved a positive EVA and the lowest median level of EVA created is almost 2 per cent of capital invested in the company.
Research limitations/implications
Future research may try to investigate other markets. The paper's focus on Italy for data collection for L&F is problematic and data are collected from a unique data base.
Practical implications
SHV creation is the main strategic objective of L&F companies so the paper is of interest to both academics and practitioners.
Originality/value
This is the first study focusing on SHV creation by non‐depository financial institutions and, especially, L&F companies.
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Acquisition currency is the possibility, enjoyed mainly by listed companies, of paying for acquisitions with paper (i.e. with conversion shares) instead of financial means…
Abstract
Purpose
Acquisition currency is the possibility, enjoyed mainly by listed companies, of paying for acquisitions with paper (i.e. with conversion shares) instead of financial means, decreasing the participating share of the controlling shareholder as little as possible. The paper seeks to address the issues.
Design/methodology/approach
The paper describes an original model to deal with the conceptual framework of the problem.
Findings
The acquisition currency game is interesting and it is worth playing it. It is clear that at a certain point the mechanism breaks and it is useful to see what happens. A mechanism that continues to increase the P/E does not exist; at a certain point there must be a limit.
Originality/value
The paper illustrates that the model convincingly describes some current behaviour of stock exchange prices and alerts about some dangerous situations.
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Marie‐Paule Laurent, Mathias Schmit and Suk Chun Van Belle
The purpose of this paper is to examine residual value risk modelling issues with a focus on automotive lease portfolios. Residual value risk is approached through a re‐sampling…
Abstract
Purpose
The purpose of this paper is to examine residual value risk modelling issues with a focus on automotive lease portfolios. Residual value risk is approached through a re‐sampling technique that provides the probability density function of losses and VaR measures for credit portfolios.
Design/methodology/approach
The methodology is applied to a portfolio of 37,523 operating leases issued between 1989 and 2001 by a major European financial institution.
Findings
The results show that residual value losses are low and sometimes non‐existent. Moreover, the major part of residual value risk is idiosyncratic and can thus be eliminated through adequate diversification. Additionally, this internal model seems to prove that capital requirements stemming from the Basel Committee's proposed new framework are somehow overestimated.
Originality/value
This paper advocates determining a more accurate risk weight for residual value risk in order to better reflect this relatively low‐risk part of leasing activities.
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Giacomo De Laurentis and Jacopo Mattei
The purpose of this paper is to verify recovery risk management capabilities by lessors. It tests several hypotheses and finds out interesting specific results for lessors.
Abstract
Purpose
The purpose of this paper is to verify recovery risk management capabilities by lessors. It tests several hypotheses and finds out interesting specific results for lessors.
Design/methodology/approach
The approach is empirical: two different database of leasing contracts are analysed with econometric methodologies.
Findings
There is clear evidence that: lessors are ex ante able to balance the probability of default and the loss given default case by case, using proper contract structures; and they carefully manage recovery procedures and strategies according to operations' characteristics.
Research limitations/implications
The data used are large enough, but come from institutions concentrated in Italy. Future research could be extended to other relevant countries.
Practical implications
Results presented are verified in leasing companies which made a limited use of rating systems and credit risk model: they have been achieved by the continuous improvements of traditional lending practices. The development of modern reliable systems can enhance risk management capabilities; our findings can help building more structured and advanced credit risk management tools.
Originality/value
The paper adds to the literature in the sense that gives clear evidence of a neglected but important fact of real world credit markets: financial intermediaries have the capability of properly assessing risk components and manage loss given default (LGD) in order to control overall credit risk.
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Alessandro Carretta and Gianni Nicolini
Leasing evaluation is a subject that has drawn significant interest in economic circles for many years. The numerous models proposed in the literature have approached the topic…
Abstract
Purpose
Leasing evaluation is a subject that has drawn significant interest in economic circles for many years. The numerous models proposed in the literature have approached the topic from a variety of outlooks and approaches. The contributions made to date, however, all share what would appear to be an unwritten premise: namely, that leasing evaluation logically occurs prior to the start of the leasing relationship. The purpose of this paper is to eliminate this premise, in order to take an in‐progress approach to the evaluation of leasing.
Design/methodology/approach
The evaluation approach is based on a model that takes into account both the real factors (the market value of the asset) and the financial aspects of the lease (interest rates on the market). The leasing price is arrived at by taking the sum of: the advantage offered by the leasing, as compared to potential purchase of the asset on the spot market; and the added yield provided by the leasing, as compared to alternative investments.
Findings
The paper finds that an in‐progress approach allows measurement of the value of a leasing even if the lessor and the lessee have already decided to initiate the leasing relationship. This approach is called for when one of the parties (the lessor or the lessee) is replaced, as well as in cases where pathological situations lead to the interruption of the relationship, plus instances where it is necessary to carry out estimates for accounting purposes. The need to evaluate the leasing in terms of its different components (real and financial) also emerges from the instructions contained in the IAS17 regarding leasing.
Originality/value
The contribution of the work to the leasing evaluation theme can be identified in a different perspective that can be useful both in a financial point of view and in an accounting one.