Not on the Same Page - Comprehensibility of MBS Investment Prospectuses

43 Pages Posted: 10 Aug 2022 Last revised: 16 Mar 2023

See all articles by Martin Thomas Hibbeln

Martin Thomas Hibbeln

University of Duisburg-Essen - Mercator School of Management

Ralf Metzler

University of Duisburg-Essen - Mercator School of Management

Werner Osterkamp

University of Duisburg-Essen - Mercator School of Management

Date Written: August 5, 2022

Abstract

We investigate whether banks lower the comprehensibility of investment prospectuses to obfuscate low securitization quality. Utilizing commonly used complexity proxies that are mostly based on the volume of the investment prospectus, we find no impact on the performance of European mortgage-backed securities. In contrast, focusing on the comprehensibility as a combination of prospectus volume and text readability, we find that originators obfuscate low securitization quality by lowering the comprehensibility of the investment prospectus, resulting in higher defaults and lower returns. Investors only partially price these dimensions of complexity: Since the financial crisis, investors have been demanding a significant risk premium for prospectus volume but not for text readability.

Keywords: Complexity, Prospectus Comprehensibility, Security Design, Text Analysis

JEL Classification: D82, D83, G01, G12, G14, G23

Suggested Citation

Hibbeln, Martin Thomas and Metzler, Ralf and Osterkamp, Werner, Not on the Same Page - Comprehensibility of MBS Investment Prospectuses (August 5, 2022). Available at SSRN: https://ssrn.com/abstract=4182623 or http://dx.doi.org/10.2139/ssrn.4182623

Martin Thomas Hibbeln (Contact Author)

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany
+49 203 379-2830 (Phone)

Ralf Metzler

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany

Werner Osterkamp

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany

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