Market Reaction to Securitization Retained Interest Impairments during the Financial Crisis of 2007-2008: Are Implicit Guarantees Worth the Paper They’re Not Written On?

62 Pages Posted: 19 Nov 2009 Last revised: 19 Sep 2012

See all articles by Dan Amiram

Dan Amiram

Tel Aviv University - Coller School of Management

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Ken V. Peasnell

Lancaster University - Department of Accounting and Finance

Catherine Shakespeare

University of Michigan - Stephen M. Ross School of Business

Date Written: December 25, 2011

Abstract

The collapse of the securitization market during the 2007-2008 Financial Crisis resulted from investors’ concern with the value of securitized assets and securities issued by special purpose entities (SPEs). Research has shown that prior to the Crisis, investors valued equity of sponsor-originator banks (S-Os) as if there were an implicit guarantee extended to SPE creditors that would be fully honored. We predict that the Crisis caused investors to value S-O equity as if such guarantees would not be honored. We test this prediction in two ways: by estimating cross-sectional equity valuation models for banks before and during the Financial Crisis, and by testing for changes in various market metrics in response to retained interest writedown events during the Financial Crisis. The valuation tests reveal that whereas prior to the Crisis SPE debt and equity was valued similarly to S-O debt and equity, this relation ceased to hold after the Crisis unfolded. The event study results reveal an increase in trading volume, equity volatility, and spread when retained interest writedowns are announced, which is consistent with the market viewing such events as providing significant, but ambiguous information regarding whether S-Os would honor their implicit guarantees. Additional analyses reveal that investor reaction is concentrated among those S-Os where there is ambiguity as to whether they will honor their implicit guarantees.

Keywords: securitizations, asset writedowns, retained interest, information asymmetry, financial crisis, financial institutions

JEL Classification: M41

Suggested Citation

Amiram, Dan and Landsman, Wayne R. and Peasnell, Kenneth V. and Shakespeare, Catherine, Market Reaction to Securitization Retained Interest Impairments during the Financial Crisis of 2007-2008: Are Implicit Guarantees Worth the Paper They’re Not Written On? (December 25, 2011). Available at SSRN: https://ssrn.com/abstract=1508664 or http://dx.doi.org/10.2139/ssrn.1508664

Dan Amiram (Contact Author)

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Kenneth V. Peasnell

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+44 1524 593631 (Phone)
+44 1524 847321 (Fax)

Catherine Shakespeare

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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