Are Asset Securitizations Sales or Loans?

Abstract

This study addresses whether asset securitizations are really asset sales or a form of secured borrowing, by estimating cross-sectional equity valuation regressions to assess whether the stock market treats securitized assets and liabilities held by a special purpose entity (SPE) as assets and liabilities of the sponsor-originator (S-O). Although all sample firms account for asset securitizations as sales, we find that the market views such SPE assets and liabilities as belonging to the S-O, i.e., the risk and rewards of ownership of the transferred assets reside with the S-O and not the SPE. Our findings are consistent with the explanation that sale-based asset securitizations enable SPE bondholders to retain priority in bankruptcy of the S-O while also enabling the S-O to obtain lower borrowing costs by implicitly guaranteeing the SPE’s debt.

Asset Securitizations and Credit Default Swaps

“…The remainder of the sample firms are diversified across a wide range of industries. Compared with prior literature (Niu & Richardson, ; Landsman et al., ; Dechow et al., ), this study has a larger and more diversified sample…”

“…In theory, the existence of the implicit recourse can be explained from two perspectives. Ex ante, the implicit recourse is essential to assure the bankruptcy remoteness of SPEs (Landsman et al, 2008), thus reducing the bankruptcy costs in the transaction. Without the implicit recourse, investors would charge higher interests on lending in case the thinly capitalized SPEs might face liquidity shortages or other financial difficulties.…”

“…Research into securitization finds that off-balance sheet securitization is a borrowing rather than a sale by the originator (Niu & Richardson, 2006;Landsman et al, 2008). If securitization is a borrowing, then securitization increases the leverage of the originator.…”

“…Although prior research has examined various aspects of off-balance sheet securitizations (Niu & Richardson, 2006;Chen et al, 2008;Landsman et al, 2008;Dechow & Shakespeare, 2009;Cheng et al, 2011;Barth et al, 2012), empirical evidence is scarce on the implications of asset securitizations with different structures. In particular, little is known about on-balance sheet securitizations.…”

How Fair Values and Accounting Structures Allow Triple-Counting Income

“…Our findings suggest that the timing may be secondary to the agency environment in terms of the impact on earnings, specifically with respect to earnings management. Landsman, Peasnell, and Shakespeare (2008) address whether asset securitizations are interpreted by the market as sales or loans. They restate the results of securitizing firms as if they had used financing accounting.…”