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Securitization and Capital Structure in Nonfinancial Firms: An Empirical Investigation

Authors

  • MICHAEL LEMMON,

  • LAURA XIAOLEI LIU,

  • MIKE QINGHAO MAO,

  • GREG NINI

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    • Lemmon is at BlackRock, Liu is at Hong Kong University of Science and Technology, Mao is at Erasmus University Rotterdam, and Nini is at The LeBow College of Business at Drexel University. We thank Cam Harvey (the Editor), an Associate Editor, and an anonymous referee. We have benefitted from discussions with Ann Rutledge from R&R consulting and Victor Hongwei Yu from Fangda Partners. We thank Darwin Choi, Sudipto Dasgupta, Fei Ding, Mei Feng, Todd Gormley, Vidhan Goyal, Amiyatosh Purnanandam, Mark Seasholes, Irina Stefanescu, Dragon Tang, Ke Tang, Chu Zhang, and seminar participants at Hong Kong University, Hong Kong University of Science and Technology, Cheung Kong Graduate School of Business, the University of Houston, the University of New South Wales, York University, Stanford, Wharton, the Australasian Finance & Banking Conference, the European Financial Management Asia Finance Symposium, the Asian Finance Association International Conference, the Financial Intermediation Research Society Conference, the Financial Management Association European Conference, and the 2012 China International Conference in Finance for helpful comments. We acknowledge financial support from Hong Kong RGC Competitive Earmarked Research Grant (Grant No: 641709). We thank Yuk Shan Liu, Siming Tian, and all students participating in 2008, 2009 HKUST UROP programs for their excellent research assistance. We especially thank Sanket Korgaonkar for invaluable assistance. All errors are our own. The paper previously circulated under the titles “Asset-backed securitization in industrial firms: An empirical investigation” and “Special purpose vehicles and nonfinancial corporate finance.”


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.

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