Not on the Same Page - Comprehensibility of MBS Investment Prospectuses

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