Leasing, Ability to Repossess, and Debt Capacity

Posted: 23 Mar 2009

See all articles by Andrea L. Eisfeldt

Andrea L. Eisfeldt

UCLA Anderson School of Management

Adriano A. Rampini

Duke University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: April 2009

Abstract

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

Suggested Citation

Eisfeldt, Andrea L. and Rampini, Adriano A., Leasing, Ability to Repossess, and Debt Capacity (April 2009). The Review of Financial Studies, Vol. 22, Issue 4, pp. 1621-1657, 2009, Available at SSRN: https://ssrn.com/abstract=1365690 or http://dx.doi.org/hhn026

Andrea L. Eisfeldt (Contact Author)

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://https://sites.google.com/site/andrealeisfeldt/

Adriano A. Rampini

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708
United States
+1 919 660-7797 (Phone)
+1 919 660-8038 (Fax)

HOME PAGE: http://faculty.fuqua.duke.edu/~rampini/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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