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

Yifan JIA, Jeong-Bon KIM, Ying MAO, Ke WANG, Zheng WANG

Research output: Journal PublicationsJournal Article (refereed)peer-review

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 Standards 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.
Original languageEnglish
Number of pages22
JournalAccounting Horizons
DOIs
Publication statusE-pub ahead of print - 20 Jan 2025

Bibliographical note

We appreciate insightful comments and valuable suggestions from Huai Zhang (editor) and two anonymous reviewers. We are also grateful for comments from and discussions with Christina Mashruwala, Bohan Song, Heather Wier, Jing Zhang, and Liandong Zhang. We thank Ruinan Sun, Yusheng Wang, and Yi Zhang for their excellent research assistance.

Funding

Yifan Jia acknowledges financial support from the Fundamental Research Funds for the Central Universities, Nankai University [Grant No. 63222061]. Jeong-Bon Kim and Zheng Wang acknowledge financial support from the general research fund (GRF) of the Hong Kong Research Grants Council (Project No. 151411). Ying Mao and Ke Wang have no conflicts of interest related to this research.

Keywords

  • asset-backed securitization
  • crash tisk
  • gain on sales
  • off-balance-sheet accounting
  • SFAS 166/167

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