Both accounting and regulatory treatments classify securitizations as a “sale” of assets, therefore allowing the issuer to remove the assets from their books. The purpose of this paper is to present conjectural evidence of recourse activity and bankruptcy treatment that undermine the fundamental concept of true sale.
The authors use investor reactions to firm’s first securitizations to isolate investors’ views of the potential risk transfer.
Investor reactions to firms’ first securitization announcements suggest that investors, themselves, think of the effects of securitizations as more like a financing than an asset sale. Firms securitizing for the first time exhibit negative short-term equity returns and negative long-term operating performance, reactions more similar to financings than asset sales. Additional analysis shows that securitization is also associated with increased systematic risk, suggesting that the rapid growth fueled by securitization is similar to increasing leverage. The effect is more pronounced for banks than non-banks.
This is the first study to have used firms' first securitizations to analyze the nature of risk transfer in securitizations. The results show that off-balance-sheet treatment for securitizations may be inappropriate, given investor perceptions of the nature of potential contingent liabilities.
The authors wish to thank seminar participants at the Federal Reserve Bank of New York, the Federal Reserve Bank of Philadelphia, the Federal Reserve Board, and Drexel University, Kansas State University, and Louisiana State University and attendees at the Financial Management Association and the MARC Research Conference at Villanova University for useful comments and criticism. The authors extend specific thanks to Charles Calomiris, Gregory Elliehausen, Gary Gorton, Robert Hunt, Kose John, Andrew Kish, Dalia Marciukaityte, Eli Ofek, and Annette Poulson for general comments and guidance. All remaining errors are our own. Copyright Joseph R. Mason, 2018. All rights reserved.
Higgins, E.J., Mason, J.R. and Mordel, A.E. (2019), "Asset sales, recourse and investor reactions to initial securitizations: Evidence why off-balance sheet accounting treatment does not remove on-balance sheet financial risk", Journal of Risk Finance, Vol. 20 No. 3, pp. 291-310. https://doi.org/10.1108/JRF-11-2018-0172Download as .RIS
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