Securitization, Recourse Uncertainty, and Crash Risk

50 Pages Posted: 6 Aug 2020 Last revised: 28 Dec 2020

See all articles by Yiwei Dou

Yiwei Dou

New York University (NYU) - Department of Accounting

Joshua Ronen

New York University (NYU) - Department of Accounting

Tuba Toksoz

Koc University - College of Administrative Sciences and Economics

Date Written: December 28, 2020

Abstract

In this study, we examine how banks’ stock price crash risk is affected by recourse uncertainty embedded in securitizations. By recourse uncertainty, we mean the difficulty for equity market participants to assess the true extent of risk transfer between securitizing banks and investors in asset-backed securities due to the opacity of securitizations. We argue that this uncertainty facilitates the withholding and accumulation of negative recourse news that is subsequently released at once, resulting in crashes. Using a sample of U.S. bank holding companies for the period of 2002-2015, we find that recourse uncertainty is positively associated with the future crash risk of securitizing banks. The result holds after controlling for bank intrinsic risk. We also predict and find that this association is higher for banks with poorer information environment and for the period before the adoption of SFAS 166/167, which required enhanced disclosure about securitization activities.

Keywords: Securitization, recourse uncertainty, crash risk, financial institutions

JEL Classification: M41, M48, G12, G18, G21, G23,

Suggested Citation

Dou, Yiwei and Ronen, Joshua and Toksoz, Tuba, Securitization, Recourse Uncertainty, and Crash Risk (December 28, 2020). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3564768 or http://dx.doi.org/10.2139/ssrn.3564768

Yiwei Dou (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States

Joshua Ronen

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
Suite 10-180
New York, NY 10012-1118
United States
212-998-4144 (Phone)
212-995-4599 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jronen/

Tuba Toksoz

Koc University - College of Administrative Sciences and Economics ( email )

Rumelifeneri Yolu
Sariyer 80910, Istanbul
Turkey

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