Why do Companies Lease their Real Estate Assets?

This paper contrasts the costs and benefits of leasing, rather than owning real estate assets. Consistent with the financing and agency costs hypotheses, I find that large and high growth companies are likely to lease than to own real estate. The results also indicate that leasing companies are more efficient in using their real estate and that these benefits are compounded in share price valuation. The results indicate a strong and positive relationship between the leasing propensity and various measures of firm value, such as market-to-book, buy and hold stock returns. However, I find that the relationship between value and leasing propensity is an inverse U-shaped optimized at about 65% leasing, suggesting that the market is also considering the costs of not owning real estate. JEL Classification: G32