A preliminary look at effects of asset‐backed securitization on shareholders

Abstract

Purpose

Asset‐backed securitization (ABS), which was brought into China in 2005 and followed by a rapid expansion, is an important financial instrument for real estate industry. The purpose of this empirical study is to assess the effects of asset securitization on stock market and equity holders' wealth by examining stock price changes upon securitization transactions in China from 2005 to September 2008.

Design/methodology/approach

Event study is implemented to test the wealth effects of ABS on shareholders. First, normal stock returns of companies with ABS issuance during the studied period are introduced by running the market model regression; excess returns to stockholders at the time that the securitization became public knowledge are then examined; finally, significance of the excess returns are tested and influencing factors including firm and transaction characteristics are discussed.

Findings

This paper finds that securitization generally does not have significant impact on wealth of stockholders; a considerable number of securitizations are even wealth destroying. The paper interprets these findings to mean that securitization is usually a negative signal to the stock market for first‐time securitizers, but indifferent or positive for frequent securitizers. Additionally, wealth effect of securitization on stockholders also largely depends on its underlying assets.

Originality/value

The outcome of this paper will assist companies, banks, and governments in understanding the effects of asset securitization, thus maximizing gains from securitization and enacting suitable polices and regulations. The paper suggests that companies and governments should examine market conditions and promote securitization only when the market is calm. Additionally, first‐time issuers of asset securitization should be cautious of possible losses caused by signs of the firm's insufficient funding, while subsequent issuance can be regarded as a relatively safe financial instrument.

Citation

Fang, M. and Long, F. (2009), "A preliminary look at effects of asset‐backed securitization on shareholders", Journal of Financial Management of Property and Construction, Vol. 14 No. 3, pp. 248-256. https://doi.org/10.1108/13664380911000468