As the securitization of trade receivables is opening up for smaller volumes, and therefore gaining popularity among smaller German firms, the effects of this financing method are of special interest. Iacobucci and Winter (2005) suggest that Asset Backed Securities (ABS) reduce agency costs. However, in the special case of securitizing trade receivables, the separation of asset and originator risks is not perfect, making the reduction of agency costs questionable. Furthermore, wealth transfers from lenders to equity holders might be possible by assigning preferred claims over receivables to the ABS holders. These issues have been analyzed using four intensive clinical studies and ten additional case studies of German firms. The results show that monitoring costs are not reduced (the SPV monitors the originator very closely), and it is not possible to enhance the effciency of the monitoring systems (default noise is only eliminated in cases of very extreme defaults). However, ABS may be used as a signaling device by smaller companies and reduces the underinvestment problem by adding financial flexibility, as described by Froot, Scharfstein, and Stein (1993). Concerning the wealth transfers, the reactions of lending banks are very intriguing and surprising. In only two cases was there a reduction of credit volume. Additionally, for smaller firms, the shortening of the balance sheet improves their credit rating. Larger firms lack this advantage because banks and rating agencies add ABS to the level of debt.
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Paper provided by Department of Finance and Accounting, EUROPEAN BUSINESS SCHOOL (ebs), International University Schloß Reichartshausen in its series ebs Working Papers on Finance and Accounting with number
061101.
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