Accounting Seminar（2013-23）

Topic：The Use of Special Purpose Vehicles and Bank Loan Contracting

Speaker: Zheng Wang,City University of Hong Kong

Discussant:Lina Wu Le Luo , Peking University

Time:: Friday,03 January,14:00-15:30pm

Location:Room K01, Guanghua Building 2

Organizer:Department of Accounting, MPAcc GSM, PKU

Abstract：

This study examines the relation between a firm’s use of special purpose vehicles (SPVs) and its bank loan contracting. An SPV is defined as a legally distinct entity created specially to carry out pre-specified activities for a sponsor company. Although SPVs can serve many legitimate business purposes, investigations into Enron and other corporate scandals reveal that SPVs have often been used improperly by sponsor companies to hide debt, manage earnings, and obfuscate financial reporting. Using a proxy of SPV activities developed by Feng et al. (2009), we find that (1) the use of SPVs tends to be associated with unfavorable loan contracting terms, including higher loan rates, collateral requirements, and restrictive covenants; and (2) the above associations between SPV use and loan contracting terms are more pronounced when the borrower firm has foreign SPVs, higher default risk, or term loans rather than non-term loans.

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