Leasing as Capital Reallocation

In this paper, we argue that leasing is an important alternative way of capital reallocation. We propose a broader measure of capital reallocation, which not only includes asset purchase and sale, but also considers lease. Empirically, we show that the lease-induced reallocation component is over 50% of the unadjusted measure (Eisfeldt and Rampini, 2006). Moreover, the cyclical patterns of lease-adjusted reallocation become less procyclical, especially for small firms. Theoretically, we develop a general equilibrium model with capital reallocation and a buy versus lease decision to explain these empirical patterns and demonstrate the role of leasing in facilitating capital reallocation