The Use of Asset-Backed Securitization and Capital Structure in Industrial Firms: An Empirical Investigation

Abstract

We investigate the determinants and consequences of the use of asset-backed securitizations (ABS) by industrial firms. ABS users are larger, more highly levered, have more securitizable assets, and greater differences in risk between their securitized and non-securitized assets compared to other firms. Debt levels in the Special purpose vehicles associated with the ABS transactions are inversely related to the risk of the assets transferred to the Special Purpose Entity (SPE), but are unrelated to the characteristics of the originators. Upon initiating an ABS program, firms experience an increase in asst return volatility, a decrease in bond rating, and increase in their total leverage (including the leverage associated with ABS). ABS users also experience an increase in their bond and loan spreads on new borrowing post-ABS initiation, while there is no change in the yield spread on existing debt. ABS spreads are much lower than bond spreads, and the overall cost of debt financing remains constant. Overall, our results are consistent with firms using ABS financing as a substitute for traditional debt financing to lower their overall financing costs. Finally, we find that SPE leverage is lower when the SPE is consolidated on the firm’s balance sheet and after 2000, consistent with changes in the accounting treatment of these transactions that have made it more difficult to treat ABS as off-balance-sheet financing. This finding suggests that firms also care about accounting reporting in determining whether to use ABS financing.