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Leasing, Ability to Repossess, and Debt Capacity

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Author Info
Adriano Rampini
Andrea Eisfeldt

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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: http://www.ces.census.gov/index.php/ces/cespapers?down_key=101792
File Format: application/pdf
File Function: First version, 2007
Download Restriction: no

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

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 46 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:cen:wpaper:07-19

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Web page: http://www.ces.census.gov

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

Other versions of this item:

Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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  1. Efraim Benmelech & Nittai K. Bergman, 2008. "Collateral Pricing," NBER Working Papers 13874, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Efraim Benmelech & Nittai K. Bergman, 2008. "Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from U.S. Airlines," NBER Working Papers 14059, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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This page was last updated on 2009-11-13.

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