The Impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 Repo 'Safe Harbor' Provisions on Investors
46 Pages Posted: 21 Jan 2016
Date Written: January 18, 2016
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 significantly expanded the exemptions from the normal workings of the U.S. Bankruptcy Code. Using a large sample of U.S. banks we study investors’ reaction to news about the promulgation of the BAPCPA repo ‘safe harbor’ provisions and the influence extending such exemptions to repos collateralized by riskier collateral had on equity market information asymmetry. We find a negative market reaction to news events about the promulgation of BAPCPA, which subsequent cross-sectional analysis suggests is at least partly driven by repo exposure. This finding suggests that investors’ perceived the increase in finance risk from the extension of the ‘safe harbor’ provisions as dominating the perceived gain from accessing cheaper finance. We also find that extending repo ‘safe harbor’ provisions without corresponding changes in accounting regulations enhancing repo agreement disclosures, gave rise to increased information asymmetry for banks with higher repo exposure. This finding vindicates the recent changes in accounting regulations mandating increased repo disclosures.
Keywords: Repurchase agreements, bankruptcy, Safe harbor
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