How Does Leasing Affect Leverage

58 Pages Posted: 19 Feb 2021

See all articles by Tim Liu

Tim Liu

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Date Written: October 24, 2020


Leasing's impact on leverage remains an open debate in the literature. Some argue that leasing and secured debt are substitutes, while others argue that leasing can preserve secured debt capacity and facilitate greater borrowing. I exploit a Moody's accounting policy change that unexpectedly made leasing less costly from a credit ratings perspective and resulted in an economically meaningful increase in leasing. Alongside this uptick in leasing, I find that secured debt decreased on average. I also find that leasing has a non-negative impact on secured debt capacity. While leasing preserves secured debt capacity across the sample of firms, only high investment opportunity firms use their secured debt capacity to increase secured borrowing. Firms with low investment opportunities, lacking reason to increase aggregate financing, substitute out secured debt when leases increase.

Keywords: Leasing, Secured Debt, Capital Structure, Moody's, Credit Ratings

JEL Classification: G3, G32, G24

Suggested Citation

Liu, Tim, How Does Leasing Affect Leverage (October 24, 2020). Available at SSRN: or

Tim Liu (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

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