Leasing, ability to repossess, and debt capacity

Published

Journal Article

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 consistentwith the explanation of leasing by practitioners, namely that leasing preserves capital, which the academic literature considers a fallacy. (JEL D23, D92, E22, G31, G32, G33).

Full Text

Duke Authors

Cited Authors

  • Eisfeldt, AL; Rampini, AA

Published Date

  • April 1, 2009

Published In

Volume / Issue

  • 22 / 4

Start / End Page

  • 1621 - 1657

Electronic International Standard Serial Number (EISSN)

  • 1465-7368

International Standard Serial Number (ISSN)

  • 0893-9454

Digital Object Identifier (DOI)

  • 10.1093/rfs/hhn026

Citation Source

  • Scopus