Off-Balance Sheet Funding, Voluntary Support and Investment Efficiency

30 Pages Posted: 14 Aug 2018 Last revised: 6 Mar 2020

See all articles by Anatoli Segura

Anatoli Segura

Bank of Italy

Jing Zeng

University of Vienna - Department of Finance

Date Written: March 22, 2019

Abstract

Financing an investment off-balance sheet gives a bank the option, but not the obligation, to voluntarily support debt repayments using its on-balance sheet funds when the investment fails. Such flexibility, which is absent with on-balance sheet funding, allows the bank to signal information about the quality of its future projects, improving investment efficiency. Yet, off-balance sheet funding reduces the bank's skin-in-the-game and 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, optimal funding mode

JEL Classification: D8, G11, G2

Suggested Citation

Segura, Anatoli and Zeng, Jing, Off-Balance Sheet Funding, Voluntary Support and Investment Efficiency (March 22, 2019). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3222658 or http://dx.doi.org/10.2139/ssrn.3222658

Anatoli Segura

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Jing Zeng (Contact Author)

University of Vienna - Department of Finance

oskar-morgenstern-platz 1
Vienna, 1090
Austria

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