The Market’s View on Accounting Classifications for Asset Securitizations Dissertation Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Minkwan Ahn, M.Acc. Graduate Program in Accounting & MIS The Ohio State University 2014 Dissertation committee: Anne Beatty, Advisor Darren Roulstone Andrew Van Buskirk Haiwen Zhang Copyright by Minkwan Ahn 2014 Abstract Prior research examines how investors view asset securitizations, and shows that investors treat securitizations as borrowings even when GAAP treats them as sales. Upon the adoption of two new accounting standards relating to asset securitizations, some off- balance-sheet securitized assets were consolidated back onto firms’ balance sheets. This study examines whether the new accounting standards result in financial reporting that is more aligned with investors’ views of asset securitizations. To address this question, this study investigates how investors viewed previously off-balance-sheet securitized assets before the two new standards became effective. In doing so, it separately examines assets that firms consolidated under the new standards and those that firms left unconsolidated. I find that investors differentiated between these two types of securitizations, treating the consolidated assets as borrowings and the unconsolidated assets as sales. I conclude that the new accounting standards are more consistent with equity investors’ views of asset securitizations. ii Acknowledgments For its guidance and support on this study, I thank my dissertation committee: Anne Beatty (Chair), Darren Roulstone, Andrew Van Buskirk, and Haiwen Zhang. I also thank Samuel Bonsall, Michael Iselin, Bret Johnson, Allison Nicoletti, and Austin Sudbury as well as workshop participants at The Ohio State University, University of Hong Kong, Hong Kong University of Science and Technology, Chinese University of Hong Kong, City University of Hong Kong, Hong Kong Polytechnic University, Seoul National University, and Korea Advanced Institute of Science and Technology for helpful comments and suggestions. I gratefully acknowledge financial support from the Fisher College of Business. iii Vita April 2008…………………………………B.S. Accounting, Brigham Young University April 2008…………………………………M.A. Accounting, Brigham Young University 2009 to present…………………………….Graduate Research Assistant, Accounting & MIS, The Ohio State University Fields of Study Major Field: Accounting & MIS iv Table of Contents Abstract.…………………………………………………………………………………..ii Acknowledgments………………………………………………………………………..iii Vita.......…………………………………………………………………………………..iv List of Tables…………………………………………………………………………….vii Chapter 1. Introduction.......................................................................................................1 Chapter 2. Background on Asset Securitizations...............................................................13 2.1 Typical Structure of Asset Securitizations.......................................................13 2.2 Accounting for Asset Securitizations..............................................................14 2.2.1 SFAS 140 and FIN 46(R).................................................................14 2.2.2 SFAS 166 and SFAS 167.................................................................17 Chapter 3. Related Literature Review...............................................................................20 Chapter 4. Hypotheses Development................................................................................25 Chapter 5. Research Design..............................................................................................28 v 5.1 Tests of H1 - H3...................................................................................33 5.2 Tests of H4...........................................................................................38 Chapter 6. Sample and Descriptive Statistics....................................................................40 Chapter 7. Results..............................................................................................................43 7.1 Tests of H1 - H3...................................................................................43 7.2 Tests of H4...........................................................................................45 Chapter 8. Robustness Tests..............................................................................................48 Chapter 9. Conclusion........................................................................................................51 References.........................................................................................................................54 Appendix A: Accounting Standards for Asset Securitizations..........................................58 Appendix B: 10-K Filings Examples - Impact of SFAS 166 and SFAS 167....................59 Appendix C: Variable Definitions.....................................................................................60 Appendix D: Sample Selection Procedures.......................................................................62 Appendix E: Tables............................................................................................................63 vi List of Tables Table 1. Descriptive Statistics……………………………………………………...……63 Table 2. Distribution of Estimated SPE Assets (EST_Securitized)...................…………66 Table 3. Relation between Equity Risk (σR) and QSPE and VIE Assets……………......67 Table 4. Relation between Equity Risk (σR) and Estimated SPE Assets (EST_Securitized)..............................................................................................................68 Table 5. Relation between Estimated SPE Assets (EST_Securitized) and Consolidated Securitized Assets (CONS_Securitized)........................................…………....................69 Table 6. Relation between Equity Risk (σR) and QSPE and VIE Assets beyond the Type of Assets............................................................................................................................70 Table 7. Relation between Equity Risk (σR) and QSPE and VIE Assets Using Other Deflators............................................................................................................................72 Table 8. Relation between Equity Risk (σR) and QSPE and VIE Assets beyond Influential Observations......................................................................................................................74 vii Chapter 1. Introduction Asset securitizations are a large source of financing for firms, especially for banks. Banks that securitize assets are typically among the largest banks. Securitizing banks make up 83% of total assets for all banks. Barth et al. (2012) report that the size of the median securitizing bank is over $40 billion in assets. Among securitizing banks, Barth et al. (2012) report that securitized assets constitute on average 20% of the banks’ total assets. Securitization transactions are accounted for as either sales or secured borrowings and many of the transactions are treated as sales under GAAP. However, various groups including financial analysts and investors argued that these transactions should be considered borrowings because firms may retain significant risk in securitized assets transferred to special purpose entities (SPEs) by providing implicit (i.e., non-contractual) recourse on the assets. To provide insight into the ongoing controversy over the accounting for asset securitizations, prior research examines how investors view asset securitizations, and indicates that investors assume that on average firms will provide implicit recourse on securitized assets (Niu and Richardson 2006; Landsman et al. 2008; Chen et al. 2008; Barth et al. 2012). Concerns about implicit recourse became apparent during the recent 1 financial crisis.1 These concerns led the Financial Accounting Standards Board (FASB) to issue two new accounting standards, SFAS 166 and SFAS 167, resulting in firms bringing some of their off-balance-sheet securitized assets back onto their balance sheets. This study examines whether the two new accounting standards result in financial reporting that is more aligned with investors’ views of asset securitizations. To address this question, this study investigates how investors viewed previously off-balance-sheet securitized assets before the new standards became effective. In doing so, it separately examines assets that firms consolidated under the new standards and those that firms left unconsolidated. Then, extending prior research, this study also examines whether, for assets consolidated under the new standards, investors distinguished between securitizations going through two different accounting structures prior to the adoption of the new standards.2 By addressing whether the new accounting standards are more consistent with investors’ views of asset securitizations, this study provides evidence on the relative effectiveness of the new accounting standards to the old accounting standards at identifying implicit recourse.3 In a typical securitization transaction, a firm transfers pools of financial assets such as mortgages and credit card receivables into an SPE that finances the acquisition of these assets by issuing debt securities. Because the securitizing firm knows more about the credit risk of the transferred assets, the firm usually provides some form of recourse