Working Paper: NBER ID: w11190
Authors: Gary Gorton; Nicholas S. Souleles
Abstract: Firms can finance themselves on- or off-balance sheet. Off-balance sheet financing involves transferring assets to "special purpose vehicles" (SPVs), following accounting and regulatory rules that circumscribe relations between the sponsoring firm and the SPVs. SPVs are carefully designed to avoid bankruptcy. If the firm's bankruptcy costs are high, off-balance sheet financing can be advantageous, especially for sponsoring firms that are risky. In a repeated SPV game, firms can "commit" to subsidize or "bail out" their SPVs when the SPV would otherwise not honor its debt commitments. Investors in SPVs know that, despite legal and accounting restrictions to the contrary, SPV sponsors can bail out their SPVs if there is the need. We find evidence consistent with these predictions using data on credit card securitizations.
Keywords: Securitization; Special Purpose Vehicles; Bankruptcy Costs
JEL Codes: G3; G2; E51; K2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| SPVs exist primarily to avoid bankruptcy costs (G33) | SPVs are structured to prevent bankruptcy events from occurring (G33) |
| Implicit recourse from sponsors to SPVs (G33) | Influences investors' perceptions of risk (G41) |
| Implicit recourse from sponsors to SPVs (G33) | Affects the pricing of SPV securities (G19) |
| Structure of SPVs allows firms to lower cost of capital (G32) | Avoiding bankruptcy-related premiums (G33) |
| Riskier firms utilize SPVs more frequently (G32) | Firm risk influences the use of off-balance sheet financing (G32) |