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Secured lending versus leasing: the role of asset management in capital structure

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  • Anna Maria C Menichini
  • Maria Grazia Romano

Abstract

We propose a theory of leasing where incentive problems in asset use and maintenance, along with borrowing constraints, shape firms’ renting decision. When secured lending finances asset purchases but the owner’s uncontractible maintenance determines its residual value, collateral constraints endogenously arise due to privately unprofitable maintenance, causing asset depletion and credit rationing. Leasing contracts bundling financing with maintenance restore maintenance incentives, but create agency problems on the lessee, who may choose insufficient care in asset usage. We find that leasing mitigates credit rationing and facilitates secured lending. However, contrary to conventional wisdom, it may be non-monotone in financing constraints, explaining small firms limited reliance on it. We provide novel testable predictions regarding the use of leasing in different industries.

Suggested Citation

  • Anna Maria C Menichini & Maria Grazia Romano, 2025. "Secured lending versus leasing: the role of asset management in capital structure," Review of Finance, European Finance Association, vol. 29(6), pages 1871-1907.
    • Handle: RePEc:oup:revfin:v:29:y:2025:i:6:p:1871-1907.
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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