Securitization and Accounting Quality: Evidence from Collateralized Loan Obligations

48 Pages Posted: 12 Feb 2020 Last revised: 2 Nov 2021

See all articles by Xiaoli Hu

Xiaoli Hu

National University of Singapore

Yupeng Lin

National University of Singapore

Xin Liu

Research School of Finance, Actuarial Studies & Applied Statistics, CBE, Australian National University

Date Written: February 1, 2019

Abstract

Using a large sample of collateralized loan obligation (CLO) portfolios, we examine the role of borrowers’ accounting quality in corporate loan securitization. We find that all else equal, CLO managers prefer loans from firms with high accounting quality. This effect is stronger when borrowers have a worse external information environment, or seller banks have lower reputations or lower capital ratios, or when the relationship between CLO managers and seller banks is weaker. Moreover, we show stronger effects among CLOs that more frequently rebalance portfolios or have more loans or more unique loan issuers in their portfolios. Finally, we show that CLO managers’ large-scale sales of loans with high accounting quality are positively associated with subsequent loan downgrades, providing direct evidence that accounting information enhances the timely execution of CLOs’ portfolio rebalancing. Overall, our findings suggest that high quality accounting information facilitates CLO managers’ screening and monitoring activities.

Keywords: Collateralized Loan Obligation (CLO), Securitization, Accounting Information, Screening, Monitoring

JEL Classification: G14, G20, G23, G33

Suggested Citation

Hu, Xiaoli and Lin, Yupeng and Liu, Xin, Securitization and Accounting Quality: Evidence from Collateralized Loan Obligations (February 1, 2019). Available at SSRN: https://ssrn.com/abstract=3521668 or http://dx.doi.org/10.2139/ssrn.3521668

Xiaoli Hu

National University of Singapore ( email )

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Yupeng Lin (Contact Author)

National University of Singapore ( email )

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Xin Liu

Research School of Finance, Actuarial Studies & Applied Statistics, CBE, Australian National University ( email )

Kingsley Street
acton, ACT 0200
Australia

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