Securitization and Capital Structure in Nonfinancial Firms: An Empirical Investigation

Abstract

Contrary to recent accounts of off‐balance‐sheet securitization by financial firms, we show that asset securitization by nonfinancial firms provides a valuable form of financing for shareholders without harming debtholders. Using data from firms’ SEC filings, we find that securitization is attractive to firms in the middle of the credit quality distribution, which are the firms with the most to gain. Upon initiation, firms experience positive abnormal stock returns and zero abnormal bond returns, and largely use the securitization proceeds to repay existing debt. Securitization minimizes financing costs by reducing expected bankruptcy costs and providing access to segmented credit markets.

Debt collateralization, capital structure, and maximal leverage

“…Empirically, Nadauld and Weisbach (2012) find evidence that securitization of corporate loans was associated with lower spreads by 17 basis points, consistent with a reduction in cost of capital. Lemmon et al (2014) find that securitization of receivables by nonfinancial firms decreases financing costs by providing access to segmented markets, and innovations in capital structure increase firm value even for large, mid-tier credit firms. Measures of how funding markets treat derivative debt contracts should correspond to increases in debt riskiness together with lower risk premia.…”

Does the Use of Special Purpose Entities Affect Firm Value? Evidence from Indonesian Listed Nonfinancial Firms

“…Contrary to the findings of Lemmon, Kim find that a firm's use of SPEs is associated with unfavorable loan contract terms, including higher loan rates, collateral requirements, and restrictive covenants [4,10]. They argue that these unfavorable loan contract terms are caused by perceived increase in the information risk faced by creditors due to the use of SPEs by borrowing firms.…”

“…Lemmon examine the securitization activities involving the use of SPEs by a sample of 434 nonfinancial firms for the periods of 1996-2009, and find that securitization lowers financing costs by reducing expected bankruptcy costs and providing sources of cheaper financing to sponsoring companies with lower credit ratings [4].…”

“…While Gorton and Souleles argue that firms use SPEs to avoid bankruptcy costs, Lemmon et al has provided evidence that securitization through the use of SPEs has enabled firms to reduce their financing costs by reducing expected bankruptcy costs and accessing additional funds from corporate credit markets that are segmented due to the presence of some market frictions or inefficiencies [1,4].…”

“…It must be that the use of SPEs has provided user firms with significant economic benefits, that otherwise firms will not use SPEs in their activities. Extant literature suggests that firms use special purpose entities (SPEs) to serve one or more of the following purposes, which are: (i) to obtain cost efficient external financing by innovatively isolate business risk as well as financial risk and exploiting segmented capital markets through securitization process [1,4], (ii) to reduce global taxes through creative tax planning using establishments in tax haven or tax treaty countries [5][6][7][8], and (iii) to manage earnings to achieve certain financial reporting objectives.. The objective of this paper is to examine the effect of the use of SPEs on firm value, and therefore to provide evidence whether, on average, firms that are SPEs users have higher firm value compared to those firms that are not SPEs users.…”