Leasing, Ability to Repossess, and Debt Capacity
Adriano Rampini () and
Working Papers from U.S. Census Bureau, Center for Economic Studies
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.
Keywords: leasing; secured debt; collateral; repossession; debt capacity; capital structure (search for similar items in EconPapers)
JEL-codes: D23 D92 E22 G31 G32 G33 (search for similar items in EconPapers)
Pages: 46 pages
New Economics Papers: this item is included in nep-cfn and nep-mac
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https://www2.census.gov/ces/wp/2007/CES-WP-07-19.pdf First version, 2007 (application/pdf)
Journal Article: Leasing, Ability to Repossess, and Debt Capacity (2009)
Working Paper: Leasing, Ability to Repossess, and Debt Capacity (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:cen:wpaper:07-19
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