Off-balance-sheet Financing Research Based On Incomplete Contracts

The connotation and extension of the off-balance sheet ("OBS") financing is abundant, and can be performed for leases, repurchase, securitization, special purpose entities, derivative financial instruments, contingent liabilities and other specific means of single or combined use of. In the context of financial innovation, financial products or transactions relevant to OBS financing become more complicated. As economic substances of OBS financing activities and forms of it are not entirely consistent, accounting standards usually lagged behind and OBS financing can not be properly identified and measured, thereby reducing the transparency of financial reporting, increasing the difficulty of supervision and obscuring the potential risks. Because of this, OBS financing gradually became an important source of financial fraud and financial risks. In the recent ten years, no matter an isolated incident such as Enron or Lehman, or the systematic crisis derived from the U.S. subprime mortgage market, are vividly reflects this.In recent years, China’s OBS financing is also developing rapidly. To take precautions, China’s academia and regulatory authorities should carry out deep and systematic study on the theoretical background, motivations, forms and change laws of OBS financing, adhere to the philosophy of innovation and regulatory coordination, and strengthen the norms and guide the prospective of the measures to effectively guard against financial risks. This is the practical significance of this dissertaion.Starting from incompletion of accounting standards, this dissertation analyzed the common reasons of enterprise to engage in OBS financing, and then focus on OBS financing activities in the U.S. financial market to demonstrate the process from innovation to out-of-control. The dissertation is divided into eight chapters as follows:Chapters Ⅰ and Ⅱ are the basis of the dissertation. Chapters Ⅰ introduce the research background and significance of OBS financing and definition of research methods, and the main contribution. On the basis of incomplete contract theory, Chapter Ⅱ set up the basic analytical framework consisting of three contract levels by "Accounting Standards-Managers motivation-Financing ", as the overall logic chain of the dissertation.Chapter Ⅲ shows the relevant accounting standards of OBS financing and their "gaps". Taking FASB and IASC/IASB for example, this chapter introduced the accounting standards on leases, non-consolidated equity investments, transfer of financial assets, derivative financial instruments and the continuous improvement process, demonstrate the OBS impacts of the various types of accounting standards of and objective inevitability of the "gaps".Chapter Ⅳ analyzes the motivation of managers on OBS financing. At beginning, this chapter builds a simple economic game model to prove that under certain conditions the accounting standards’"gaps" could induce managers to pursue their own interests to maximize by OBS financing. Further, based on the contractual relationship between shareholders, creditors and managers, this chapter analyzes subjective and objective motivations of OBS financing. The chapter argues that, in subjective motivation, the incentives contract between shareholders and managers lead to "adverse incentive effects" which drive the managers to make use of the "gaps". And in objective motivation, the incompleteness of the debt contract lead to "asset substitution effect" and the creditors of the transfer of wealth, and therefore managers take risk-taking behavior beyond the risk appetite of creditors. Based on this, the chapter argues that, improving managers’incentives mechanism and strengthening creditor protection are two important aspects of OBS financing.Chapters Ⅴ and Ⅵ are the third level of the basic analytical framework:mode of financing. Chapter Ⅴ studies financial innovation and its diffusion, and focuses on two theories on financial innovation: the Constraint induced theory and circumvents the control theory. Then this chapter analyzes several typical innovative OBS financing, and finally empirical analysis of some factors on bank OBSA diffusion effect. Taking the U.S. financial markets for example, Chapter VI describes after the rapid development and prosperity, the shadow banking system became a huge financial system, which paralleled to the traditional commercial banking system and free from the traditional financial regulatory system. This chapter clearly shows how OBS financing was innovated in the shadow banking system, developed and became out of control, and ultimately alienated as an important source of financial crisis.Chapter VII is the case studies on Lehman "Repo105" transactions. Following the basic analytical framework of this dissertation and by explaining Valukas report, this chapter first introduced the provisions of the repurchase transactions and related accounting standards, and then analyzes the "adverse incentive" effect of "net revenue-driven compensation mechanism" on Lehman managers. Finally, the "Repo105" transactions and transaction design, as well as the impact on the balance sheet.Chapter VIII is policy recommendations and directions for future research. This chapter provides a brief introduction to current situation and characteristic of China’s OBS financing, and on the basis of the former chapters’conclusion, put forward an overall framework and some policy suggestions on the development and supervision of OBS financing. Finally, this dissertation describes research limitations and future research directions.According to the studies, this dissertation argues that, overall thought on OBS financing should be a "three-dimensional" policy framework, namely, improving accounting standards, improving corporate governance, enhancing supervision and simultaneously promoting the innovation of financing.Innovation of this dissertation is mainly reflected in two aspects:enriches the theory of incomplete contract scope of application; extends the OBS financing research path.