Special Purpose Vehicles and Nonfinancial Corporate Finance*

We present novel empirical evidence on the use of off-balance sheet financing by publiclytraded, U.S. nonfinancial firms. We find that about 5 percent of nonfinancial 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 offbalance 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. * Contact information: Nini: The Wharton School, The University of Pennsylvania, 3620 Locust Walk, Philadelphia, PA 19104-6302; Email: [email protected]; Tel: 215-898-7770. This paper is a result of the 2009 Wharton Research Scholars program, for which we thank Martin Asher. We thank Amiyatosh Purnanandam for a useful discussion at the 2010 Financial Intermediation Research Society conference and seminar participants at the Wharton Finance brownbag seminar.