Investment, firm performance and securitization: Evidence from industrial companies

Asset-backed securitization (ABS) can generate substantial cash inflows to the firm and thus a worthwhile source of financing when other sources become very costly. Using a hand collected sample of ABS transactions done in the US, we estimate the sensitivity to ABS proceeds of both investment and firm’s performance, arguing that if both investment and firm’s performance are increasing in ABS cash flow, this will be consistent with the underinvestment mitigation hypothesis. Alternatively, if ABS activity leads to increasing investment and decreasing firm’s performance, this will provide support to the overinvestment hypothesis. Consistent with the first hypothesis, we find that ABS proceeds are associated with more investment and better market performance in firms with high financial distress probability. Furthermore, after exploring other uses of ABS proceeds, we show that high-growth firms mainly use ABS to finance their acquisitions while low-growth firms spend ABS proceeds to increase both investment and stock repurchases, which allows them to signal to the market the improvement of their growth prospects.