We demonstrate that a financial intermediary-based asset pricing model offers a compelling explanation for a new set of conditional moments of equity term structure and convenience yields. The model’s key mechanism is that the time-varying tightness of intermediaries’ leverage constraints drives significant mean reversion in the price of risk. This model guides us in devising a novel empirical methodology to estimate the tightness of these constraints (i.e., the Relative Tightness Index) from cross-sectional returns of various asset classes. Our findings affirm that this measure significantly drives the dynamics of equity yield slope and convenience yields, both empirically and quantitatively.

We study the quantitative impact of lender control rights on corporate investment, asset prices, and the aggregate economy. We build a general equilibrium model in which the breaching of a loan covenant (technical default) entails a switch in investment control rights from borrowers to lenders. Lenders optimally choose low-risk projects, thus mitigating borrowers’ risk-taking incentives and lowering the cost of equity. This mechanism generates strong macroeconomic effects and mitigates the financial accelerator. Consistent with our model, proximity to technical default in the data is associated with 4.12% lower returns and lower exposure to systematic risk.

We document that leased capital constitutes about 30% of the total productive physical assets used by US public firms. We develop an analytical framework to demonstrate how the neglect of leases leads to an overestimation of productivity. This overestimation can be decomposed into two distinct channels: one arises from the mismeasured factor share, and the other from the omitted-leased-capital channel. Empirically, we find that the overestimation of aggregate productivity is substantial, has been increasing over time, and exhibits strong countercyclicality. In the cross-section, the decomposition of overestimation presents asymmetric patterns for firms of different sizes and levels of financial constraint. Our findings highlight the critical importance of explicitly accounting for the “unmeasured” leased capital in studies on productivity measurements.