Asset Securitizations and Stock Price Crash Risk: Evidence from Nonfinancial Firms

Posted: 6 Sep 2022 Last revised: 26 Dec 2023

See all articles by Yifan Jia

Yifan Jia

NanKai University

Jeong-Bon Kim

Simon Fraser University; City University of Hong Kong

Ying Mao

Lingnan University

Ke Wang

University of Alberta - School of Business

Zheng Wang

City University of Hong Kong

Date Written: December 19, 2023

Abstract

This study examines the relation between asset-backed securitizations and future stock price crash risk in nonfinancial firms. We argue that the gain-on-sale accounting treatment for off-balance sheet securitizations facilitates managers’ withholding of bad earnings news, leading to higher crash risk. Using a propensity score-matched sample of U.S. nonfinancial firms, we find that firms engaging in off-balance sheet securitizations are associated with higher crash risk, especially for firms with gain on sales from securitizations. In 2010, the Financial Accounting Standard Board implemented SFAS 166/167 to tighten the criteria for securitization transactions to receive off-balance sheet treatment. However, our difference-in-differences analysis shows no significant effect of SFAS 166/167 on reducing securitizing firms’ crash risk. Further analyses reveal that firms engaging in off-balance sheet securitization before SFAS 166/167 conduct more real activity-based earnings management after SFAS 166/167. This evidence suggests that firms could continue to hide bad news through alternative channels as substitutes.

Keywords: asset-backed securitization, crash risk, gain on sales, off-balance sheet accounting, SFAS 166/167

Suggested Citation

Jia, Yifan and Kim, Jeong-Bon and Mao, Ying and Wang, Ke and Wang, Zheng, Asset Securitizations and Stock Price Crash Risk: Evidence from Nonfinancial Firms (December 19, 2023). Available at SSRN: https://ssrn.com/abstract=4190509

Yifan Jia

NanKai University ( email )

94 Weijin Road, Tianjin
Tianjin
China

Jeong-Bon Kim

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Ying Mao

Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

Ke Wang (Contact Author)

University of Alberta - School of Business ( email )

3-23 Business Building
Edmonton, Alberta T6G 2R6
Canada
+1 780-492-1630 (Phone)

Zheng Wang

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

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