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Leasing, Ability to Repossess, and Debt Capacity

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  • Adriano Rampini
  • Andrea Eisfeldt

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.

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File URL: ftp://ftp2.census.gov/ces/wp/2007/CES-WP-07-19.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 07-19.

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Length: 46 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:cen:wpaper:07-19

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Keywords: leasing; secured debt; collateral; repossession; debt capacity; capital structure;

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