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Off-balance sheet funding, voluntary support and investment efficiency

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  • Segura, Anatoli
  • Zeng, Jing

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.

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  • Segura, Anatoli & Zeng, Jing, 2020. "Off-balance sheet funding, voluntary support and investment efficiency," Journal of Financial Economics, Elsevier, vol. 137(1), pages 90-107.
    • Handle: RePEc:eee:jfinec:v:137:y:2020:i:1:p:90-107
    DOI: 10.1016/j.jfineco.2020.02.001
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    Cited by:

    1. Loranth, Gyongyi & Segura, Anatoli & Zeng, Jing, 2022. "Voluntary Support and Ring-Fencing in Cross-border Banks," Working Paper Series 2688, European Central Bank.
    2. Zeyu Xie & Mian Yang & Fei Xu, 2023. "Carbon emission trading system and stock price crash risk of heavily polluting listed companies in China: based on analyst coverage mechanism," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-30, December.
    3. Jennifer Betz & Maximilian Nagl & Daniel Rösch, 2022. "Credit line exposure at default modelling using Bayesian mixed effect quantile regression," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 185(4), pages 2035-2072, October.
    4. Wu, Dan & Li, Rong & Li, Yingting, 2024. "Impact of Off-Balance-Sheet Activities on the Effectiveness of Monetary Policy," The North American Journal of Economics and Finance, Elsevier, vol. 73(C).
    5. Jin, Linlin & Liu, Mingzhi & Wu, Zhenyu & Zhang, Zixu, 2023. "The difference of investment efficiency between family and non-family firms: An international scope," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 88(C).
    6. Lóránth, Gyöngyi & Morrison, Alan & Zeng, Jing, 2020. "Organizational Structure and Investment Strategy," CEPR Discussion Papers 15602, C.E.P.R. Discussion Papers.
    7. Parnes, Dror, 2022. "Banks' off-balance sheet manipulations," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 314-331.
    8. Kong, Dongmin & Ji, Mianmian, 2024. "Individual investors’ dividend tax reform and investment efficiency," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1102-1119.

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    More about this item

    Keywords

    Off-balance sheet funding; Voluntary support; Signaling; Limited liability; Optimal funding mode;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G2 - Financial Economics - - Financial Institutions and Services

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