Asset Sales, Recourse, and Investor Reactions to Initial Securitizations: Evidence Why Off-balance Sheet Accounting Treatment Does not Remove On-balance Sheet Financial Risk

43 Pages Posted: 22 May 2009 Last revised: 11 Oct 2009

Joseph R. Mason

Louisiana State University - Ourso School of Business; University of Pennsylvania - Wharton Financial Institutions Center

Eric James Higgins

Kansas State University - College of Business Administration

Adi Mordel

Drexel University - Bennett S. LeBow College of Business

Date Written: May 22, 2009

Abstract

Both accounting and regulatory treatments classify securitizations as a “sale” of assets, therefore allowing the issuer to remove the assets from their books. This “off-balance sheet” treatment relies crucially on the concept of “true” sale. The concept most diametrically opposed from a true sale is a “financing.” In a financing, assets do not leave the firm’s books, so the transaction is exclusively “on-balance sheet.” The present paper presents conjectural evidence of recourse activity and bankruptcy seizure that undermine the fundamental concept of true sale. The paper then analyzes investor reactions to firms’ first securitization announcements, demonstrating negative short-term equity returns and negative long-term operating performance following initial securitizations. Such reactions constitute evidence that securitizations are 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, suggesting that there is substantial value to regulatory capital arbitrage in addition to accounting arbitrage.

Keywords: Bank Regulation, Securitization, Off-balance Sheet, Recourse, Bankruptcy-remote

JEL Classification: G21, G23, G28

Suggested Citation

Mason, Joseph R. and Higgins, Eric James and Mordel, Adi, Asset Sales, Recourse, and Investor Reactions to Initial Securitizations: Evidence Why Off-balance Sheet Accounting Treatment Does not Remove On-balance Sheet Financial Risk (May 22, 2009). Available at SSRN: https://ssrn.com/abstract=1107074 or http://dx.doi.org/10.2139/ssrn.1107074

Joseph R. Mason (Contact Author)

Louisiana State University - Ourso School of Business

2900 Business Education Complex
Baton Rouge, LA 70803
United States
202-683-8909 (Phone)

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3641 Locust Walk
Philadelphia, PA 19104-6218
United States

Eric James Higgins

Kansas State University - College of Business Administration ( email )

117 D Calvin Hall
Manhattan, KS 66506
United States
(785)-532-3936 (Phone)

Adi Mordel

Drexel University - Bennett S. LeBow College of Business ( email )

215-622-8695 (Phone)

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