Do bank managers use securitization gains to smooth earnings in the post- FAS 166/167 period?

Abstract

Previous literature has documented that securitization gains were used for income smoothing in the era before FAS 166 and FAS 167,11FAS 166 and 167 have been codified by the FASB as parts of ASC 810-10 and 820-20, respectively. In this paper, we refer to the legacy standards to simplify exposition. which tightened the requirements for sale accounting for securitizations. Using securitizing bank holding companies, we examine whether FAS 166/167 has reduced this income smoothing behavior. Our findings include two facets. First, at the aggregate level, time series statistics show that both the frequency of non-zero securitization gains reported and the magnitude of reported securitization gains are significantly reduced in the post- FAS 166/167 period. Second, at the firm level, our regression results indicate that even though the extent of this income smoothing behavior decreased after the issuance of FAS 166/167, securitization gains continue to be used to smooth earnings by securitizing banks in the post-FAS 166/167 period. Overall, our findings convey that FAS 166/167 has reduced the securitization gains recorded by banks but that after the regulation, banks still use securitization gains to smooth earnings.