Journal Article

Leasing, Ability to Repossess, and Debt Capacity

Andrea L. Eisfeldt and Adriano A. Rampini

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 22, issue 4, pages 1621-1657
Published in print April 2009 | ISSN: 0893-9454
Published online March 2008 | e-ISSN: 1465-7368 | DOI: https://dx.doi.org/10.1093/rfs/hhn026
Leasing, Ability to Repossess, and Debt Capacity

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  • Production and Organizations
  • Intertemporal Choice and Growth
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This paper studies the financing role of leasing and secured lending. We argue that the benefit of leasing is that repossession of a leased asset is easier than foreclosure on the collateral of a secured loan, which implies that leasing has higher debt capacity than secured lending. However, leasing involves agency costs due to the separation of ownership and control. More financially constrained firms value the additional debt capacity more and hence lease more of their capital than less constrained firms. We provide empirical evidence consistent with this prediction. Our theory is consistent with the explanation of leasing by practitioners, namely that leasing “preserves capital,” which the academic literature considers a fallacy.

Keywords: D23; D92; E22; G31; G32; G33

Journal Article.  18522 words.  Illustrated.

Subjects: Production and Organizations ; Intertemporal Choice and Growth ; Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; Corporate Governance ; Bankruptcy

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