Special Purpose Vehicles and Nonfinancial Corporate Finance

Abstract

We present novel empirical evidence on the use of off-balance sheet financing by publicly traded, U.S. non-financial firms. We find that about 5 percent of non-financial firms reported using a special purpose financing vehicle (SPV) to finance receivables in 2006. At the origination of the off-balance sheet financing program, firms experienced abnormal increases in stock prices on the order of 2 percent and experienced no change in bond prices. Compared with firms that do not use SPVs, users are larger in size, more likely to have access to internal and external financing, and have significantly more credit risk. However, users have less senior, secured bank debt in their capital structure; and nearly all users received explicit permission in a credit agreement to use off-balance sheet financing. The combined evidence suggests that off-balance sheet financing can reduce the cost of capital for a fairly unique set of firms that are relatively risky but do not rely on heavily on bank debt.

Keywords: Corporate Finance, Debt, Special Purpose Vehicles, Special Purpose Entities, Securitization

JEL Classification: G30, G32, G20