Did FAS 166 and FAS 167 Improve the Transparency of Securitizing Banks?

Abstract

This study investigates whether mandated Financial Accounting Standards No. 166 and 167 (FAS 166/167) improved the financial reporting transparency of securitizing banks. I use a difference-in-differences research design that compares four measures of information uncertainty (dispersion in analysts’ earnings forecasts, implied volatility, stock illiquidity, and bid-ask spread) in the pre- versus post-FAS 166/167 periods for securitizing versus non-securitizing banks. I find that after FAS 166/167, information uncertainty decreases for securitizing banks compared to non-securitizing banks. I exploit the later timing of the issuance of FAS 166/167 than the financial crisis of 2007-2009 and provide evidence that my results remain similar even when the confounding effects of the crisis are taken into account. I also find that securitizing banks experience even a larger decrease in information uncertainty from the pre- to post-FAS 166/167 periods when they consolidate VIEs in the post period. This study is one of the few that show variations in information uncertainty before and after an event and first to provide evidence for the disclosure and accounting implications of FAS 166/167 for securitizing banks.