The capital structure irrelevance argument of Modigliani and Miller (1958) implies that the use of debt or leases should have no impact on firm values. This classical argument leaves out several important considerations crucial for the result, in particular, counterparty credit risk. We re-examine the capital structure problem for firms that can utilize debt and leases in the presence of counterparty risk. Our numerical and empirical estimates show a negative term structure of lease rates that steepens as a function of counterparty risk. Moreover, we document numerical evidence for the complementary relationship between debt and leases in the presence of counterparty risk.

We introduce a novel application of machine learning to compare pooling and servicing agreements (PSAs) that govern commercial mortgage-backed securities. In contrast to the view that the PSA is largely boilerplate text, we document substantial variation across PSAs, both within- and across-underwriters and over time. A part of this variation is driven by differences in loan collateral across deals. Additionally, we find that differences in PSAs are correlated with ex post loan and bond performance. Collectively, our analysis suggests the importance of examining the entire governing document, rather than specific components, when analyzing complex financial securities.