Informational Efficiency in Securitization After Dodd-Frank

Abstract

We analyze how Dodd-Frank mandated risk retention affects the information investors extract from issuers' retention choices in the CMBS market. We show that the required retention level is both binding and stringent. Although this implies issuers cannot signal using the level of retention, we provide a model showing that signaling can occur by varying retention structure. The model is consistent with spreads being empirically lower in deals with a purely first-loss retention structure. A stated concern of rulemakers was asymmetric information. However, we show that, post-crisis, the level of asymmetric information in this market is quite low.

Keywords: Dodd-Frank Act, Asymmetric Information, Signaling Equilibrium, ABS.

JEL Classification: G14, G18, G21, G28