46 Pages Posted: 3 Oct 2005
Date Written: 2007
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: Leasing, secured debt, collateral, repossession, debt capacity, capital
JEL Classification: D23, D92, E22, G31, G32, G33
Suggested Citation: Suggested Citation
Eisfeldt, Andrea L. and Rampini, Adriano A., Leasing, Ability to Repossess, and Debt Capacity (2007). AFA 2007 Chicago Meetings Paper; US Census Bureau Center for Economic Studies Paper No. CES-WP-07-19; EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=811588 or http://dx.doi.org/10.2139/ssrn.811588