Renting risk and expected stock returns in memory of Simon Benninga

The holy grail of finance researchers and practitioners is to fully understand and explain the behavior of stock returns. The current study offers a new source of risk, which relates to firms' renting expenses. A major topic in finance and economics is whether to rent or own an asset. Specifically, this is interesting for businesses. This study uniquely analyzes a sample of 178,837 US firm-year observations from 1963 to 2019. This analysis shows that a risk characteristic—the Ratio of Renting expenses To Assets (RORTA)—explains the cross-section of stock returns. A higher RORTA explains higher expected stock returns. Interestingly, when analyzing only the past decade for robustness, the RORTA is the only characteristic which remains significant when controlling for Size and Book-to-Market. That is, Size and Book-to-Market are insignificant in the last decade.