Asset Securitizations and Stock Price Crash Risk: Evidence from Nonfinancial Firms
Posted: 6 Sep 2022 Last revised: 26 Dec 2023
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
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