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Off-balance sheet funding, voluntary support and investment efficiency

Anatoli Segura () and Jing Zeng

Journal of Financial Economics, 2020, vol. 137, issue 1, 90-107

Abstract: Off-balance sheet financing of an investment is covered by limited liability, whereas on-balance sheet financing creates unlimited liability towards the bank’s asset-in-place. Off-balance sheet funding thus gives the bank flexibility to voluntarily support debt repayments when the investment fails, which allows the bank to signal information about the quality of its future projects, improving investment efficiency. Yet, limited liability reduces the bank’s effort incentives. Off-balance sheet funding with voluntary support is optimal for activities that are rapidly growing or negatively correlated with existing assets. The model yields testable predictions on the relationship between off-balance sheet debt spreads and sponsors’ characteristics.

Keywords: Off-balance sheet funding; Voluntary support; Signaling; Limited liability; Optimal funding mode (search for similar items in EconPapers)
JEL-codes: D8 G11 G2 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jfineco.2020.02.001

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