This paper highlights leasing as a key corporate risk management mechanism

for hedging capital valuation risks, extending beyond its traditional financing role.

Financially constrained firms often face a trade-off between financing and hedging

due to collateral competition, a challenge known as the ”corporate risk management

paradox” (Rampini and Viswanathan, 2010, 2013). Leasing contracts, where the lessor

serves as both creditor and insurance provider, offer a more collateral-efficient hedging

solution—an aspect previously overlooked in the literature. We develop a dynamic

agency-based model to explore leasing’s dual role in financing and hedging. Using

the staggered implementation of U.S. anti-recharacterization laws as a quasi-natural

experiment, our empirical findings show that firms with greater capital value volatility—

and thus stronger hedging needs—are more likely to lease, even when financing

conditions improve. This evidence strongly supports our theoretical framework.