RFS Advance Access originally published online on March 29, 2008
Review of Financial Studies 2009 22(4):1621-1657; doi:10.1093/rfs/hhn026
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Leasing, Ability to Repossess, and Debt Capacity
Northwestern University
Duke University
Send correspondence to Adriano A. Rampini, Fuqua School of Business, Duke University, 1 Towerview Drive, Durham, NC, 27705; phone: (919) 660-7797; email: rampini{at}duke.edu
JEL Classification: D23, D92, E22, G31, G32, G33
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Abstract |
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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.
We thank S. Arping, D. Baird, F. Buera, A. Collard-Wexler, M. Fishman, K. Hagerty, R. Jagannathan, D. Jenter, S. Kaplan, R. McDonald, M. Petersen, C. Rampini, A. Raviv, D. Scharfstein, M. Spiegel (the editor), A. Sufi, S. Viswanathan, an anonymous referee, and seminar participants at Northwestern, Stanford, Berkeley, Duke, LSE, UNC, Wharton, Illinois, Imperial College, Ohio State, Yale, HBS, Chicago, Colorado, Minnesota, the Federal Reserve Bank of Philadelphia, San Francisco, Chicago, and New York, the 2006 SED Annual Meeting, the 2006 NBER Summer Institute in "Capital Markets and the Economy" and "Corporate Finance," the 2006 EFA Annual Meeting, and the 2007 AFA Annual Meeting for comments, Lynn Riggs for assistance with the data, and Olesya Baker for excellent research assistance.
DISCLAIMER: The research in this paper was conducted while the authors were Census Bureau research associates at the Chicago Census Research Data Center. Research results and conclusions expressed are those of the authors and do not necessarily indicate concurrence by the Bureau of the Census. This paper has been screened to ensure that no confidential data are revealed. Support for this research at the Chicago RDC from NSF (awards no. SES-0004335 and ITR-0427889) is also gratefully acknowledged.