Securitization and Accounting Quality: Evidence from Collateralized Loan Obligations

Abstract

Using a large sample of collateralized loan obligation (CLO) portfolios, we examine the role of borrowers’ accounting quality in corporate loan securitization. We find that all else equal, CLO managers prefer loans from firms with high accounting quality. This effect is stronger when borrowers have a worse external information environment, or seller banks have lower reputations or lower capital ratios, or when the relationship between CLO managers and seller banks is weaker. Moreover, we show stronger effects among CLOs that more frequently rebalance portfolios or have more loans or more unique loan issuers in their portfolios. Finally, we show that CLO managers’ large-scale sales of loans with high accounting quality are positively associated with subsequent loan downgrades, providing direct evidence that accounting information enhances the timely execution of CLOs’ portfolio rebalancing. Overall, our findings suggest that high quality accounting information facilitates CLO managers’ screening and monitoring activities.

Keywords: Collateralized Loan Obligation (CLO), Securitization, Accounting Information, Screening, Monitoring

JEL Classification: G14, G20, G23, G33