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Leasing, Ability to Repossess, and Debt Capacity

  • Andrea Eisfeldt

    ()

    (Department of Finance Northwestern University)

  • Adriano Rampini

This paper studies the role of leasing of productive assets. When capital is leased (or rented), it is more easily repossessed and hence leasing has higher debt capacity and relaxes financing constraints. However, leasing gives rise to an agency problem with regard to the care with which the leased asset is used or maintained. We show that this implies that more credit constrained firms lease capital, while less credit constrained firms buy capital. Our theory is consistent with the explanation of leasing provided by leasing firms, namely that leasing “preserves capital,†which is generally considered a fallacy in the academic literature. We provide empirical evidence that small and credit constrained firms lease a considerably larger fraction of their capital than larger and less constrained firms

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File URL: http://www.kellogg.northwestern.edu/faculty/eisfeldt/research/leasing.pdf
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File URL: http://repec.org/sed2006/up.8482.1139948023.pdf
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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 461.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:461
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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  2. Lewellen, Wilbur G & Long, Michael S & McConnell, John J, 1976. "Asset Leasing in Competitive Capital Markets," Journal of Finance, American Finance Association, vol. 31(3), pages 787-98, June.
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  14. 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.
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  32. Eisfeldt, Andrea L. & Rampini, Adriano A., 2007. "New or used? Investment with credit constraints," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2656-2681, November.
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