Securitizations and accounting restatements

Abstract

Purpose

The purpose of this paper is to establish a direct link between securitizations and accrual-based earnings management by investigating whether financial statements in the periods of securitizations are more likely to be restated at a later time. In addition, this study examines whether the association between securitization and accounting restatements is more pronounced in the pre-financial crisis period and for banks with less independent or industry-specialized auditors.

Design/methodology/approach

This study covers a sample of bank holding companies with restatement information between 2001 and 2012. Using the incidence of material accounting restatements as a proxy for accrual earnings management, this study investigates whether securitizations are likely used as a tool for accrual earnings management. A logistic model is applied with standard errors clustered at the firm-year level. Various robustness tests are conducted to rule out the possibilities that the results are driven by unintentional reporting errors or endogeneity of the securitization decisions.

Findings

The empirical results reveal a positive and significant association between banks’ securitization activities and the likelihood of having accounting restatements. Moreover, this positive association is more pronounced in the pre-financial crisis period and for banks with less independent or industry-specialized auditors.

Research limitations/implications

The findings suggest that managers take advantage of discretions on accounting rules for securitizations to manage earnings. This evidence provides multi-dimension implications for standard setters and practitioners, as well as investors.

Originality/value

This is one of the very first papers to document evidence that accrual earnings management is involved in securitization.

Citation

Wang, H. and Zhang, J. (2018), "Securitizations and accounting restatements", Asian Review of Accounting, Vol. 26 No. 4, pp. 571-594. https://doi.org/10.1108/ARA-10-2017-0151