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Leasing, Ability to Repossess, and Debt Capacity

  • Adriano Rampini
  • Andrea Eisfeldt

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
Download Restriction: no

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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  9. Sharpe, Steven A. & Nguyen, Hien H., 1995. "Capital market imperfections and the incentive to lease," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 271-294.
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  17. Miller, Merton H & Upton, Charles W, 1976. "Leasing, Buying, and the Cost of Capital Services," Journal of Finance, American Finance Association, vol. 31(3), pages 761-86, June.
  18. Flath, David, 1980. "The Economics of Short-Term Leasing," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 247-59, April.
  19. Ezzell, John R. & Vora, Premal P., 2001. "Leasing versus purchasing: Direct evidence on a corporation's motivations for leasing and consequences of leasing," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(1), pages 33-47.
  20. Todd Sinai & Nicholas S. Souleles, 2005. "Owner-Occupied Housing as a Hedge Against Rent Risk," The Quarterly Journal of Economics, MIT Press, vol. 120(2), pages 763-789, May.
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  26. Waldman, Michael, 1997. "Eliminating the Market for Secondhand Goods: An Alternative Explanation for Leasing," Journal of Law and Economics, University of Chicago Press, vol. 40(1), pages 61-92, April.
  27. John R. Graham & Michael L. Lemmon & James S. Schallheim, 1998. "Debt, Leases, Taxes, and the Endogeneity of Corporate Tax Status," Journal of Finance, American Finance Association, vol. 53(1), pages 131-162, 02.
  28. Smith, Clifford W, Jr & Wakeman, L MacDonald, 1985. " Determinants of Corporate Leasing Policy," Journal of Finance, American Finance Association, vol. 40(3), pages 895-908, July.
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  32. Lewis, Craig M. & Schallheim, James S., 1992. "Are Debt and Leases Substitutes?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(04), pages 497-511, December.
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