Altering Investment Decisions to Manage Financial Reporting Outcomes: Asset-Backed Commercial Paper Conduits and FIN 46

Abstract

We evaluate the manner in which sponsors of highly leveraged asset-backed commercial paper (ABCP) conduits responded to FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities an Interpretation of ARB No. 51, and its Canadian counterpart Accounting Standards Board of Accounting Guideline 15 (AcG-15), Consolidation of Variable Interest Entities. By matching commercial paper investors with corporations seeking liquidity, ABCP sponsors facilitate a significant amount of short-term, securitized financing in the U.S. FIN 46 and AcG-15 require sponsors to consolidate their ABCP conduits with their GAAP financial statements. We demonstrate that the volume of ABCP began to decline when FIN 46 was first proposed, and that this decline is primarily attributable to a reduction in North American banks' sponsorship of ABCP. We also demonstrate that North American banks entered into costly restructuring arrangements to avoid having to consolidate their conduits per the new accounting standards. Our results suggest that in certain settings, accounting standards appear to have real effects on investment activity and product-market competition.

Keywords: commercial paper conduits, consolidation, economic consequences of accounting choice, financial accouting, FIN 46, regulation, securitization

JEL Classification: G21, G32, G38, L51, M41, M44