Securitization and Accounting Quality: Evidence from Collateralized Loan Obligations

Posted: 12 Feb 2020

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 loans from companies with higher ex-ante accounting quality are more likely to be purchased and securitized by CLOs. Further analyses show that such a positive association is mainly due to the role of accounting information in alleviating the adverse selection problem in the pre-securitization period. We also examine the role of accounting information in the post- securitization period. Using the state tax rate as an instrument for securitization, we find that accounting information does not affect the default sensitivity to CLO ownership, suggesting that CLOs do not utilize accounting information in the ex-post monitoring. Overall, our findings suggest that CLOs exert great effort and care in screening during the origination phase, but have limited incentives and the ability to monitor ex post.

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

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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