The Economic Consequences of SFAS 166/167 – Evidence from Banks

Posted: 3 Apr 2017

See all articles by Qiuhong Zhao

Qiuhong Zhao

Texas A&M University - Corpus Christi

Dana A. Forgione

University of Texas at San Antonio - College of Business

Date Written: March 30, 2017

Abstract

This study examines whether SFAS 166/167 eliminating the exclusion of consolidation for qualifying special purpose entities (QSPEs) impacted the cost of equity capital for a sample of banks. This exclusion previously allowed banks to avoid consolidation of many asset securitization transactions, and these types of transactions become increasingly prevalent during and after the financial crisis of the late 2000’s. We compare changes in the cost of equity capital for a treatment sample of firms that consolidated special purpose entities after implementation of SFAS 166/167 to changes in the cost of equity capital for a control group that reported no material impact from implementation of SFAS 166/167. We find that after SFAS 166/167, the cost of equity capital increased more for the group of firms consolidating previously unconsolidated SPE’s than for the firms that were relatively unaffected by the rule change. In sum, the results suggest that SFAS 166/167 resulted in an increased cost of equity capital as the consolidations of former QSPEs and expanded disclosures of VIEs as a consequence of the revised standards might convey new risks to the market, while SFAS 166/167 might improve the transparency of information regarding QSPEs.

Suggested Citation

Zhao, Qiuhong and Forgione, Dana A., The Economic Consequences of SFAS 166/167 – Evidence from Banks (March 30, 2017). Available at SSRN: https://ssrn.com/abstract=2943670

Qiuhong Zhao (Contact Author)

Texas A&M University - Corpus Christi ( email )

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Corpus Christi, TX 78412
United States

Dana A. Forgione

University of Texas at San Antonio - College of Business ( email )

One UTSA Circle
San Antonio, TX 78249
United States
+1.210.458.6318 (Phone)
+1.810.815.5378 (Fax)

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