How Does Leasing Affect Leverage

Abstract

Studying leasing's impact on capital structure has proven challenging in the literature, as corporate leasing policy is 1) difficult to measure and 2) endogenous. I address these empirical challenges by 1) developing a novel measure of new lease contracting, and 2) exploiting a Moody's accounting policy change that induced an increase in leasing. Concurrent with this uptick in leasing, firms reduced secured debt usage. Leasing preserves secured debt capacity across the sample of firms, but only high investment opportunity firms convert their secured debt capacity into secured borrowing. Firms with low investment opportunities substitute out secured debt when leases increase.

Keywords: Leasing, Secured Debt, Capital Structure, Credit Ratings

JEL Classification: G3, G32, G24