Abstract
Recent regulatory policies require collateralized debt obligation (CDO) issuers to retain a portion of any securities they issue, but market participants argue this requirement unnecessarily restricts the flow of capital to firms. This paper tests whether removing these risk-retention requirements causes adverse selection in corporate CDO collateral pools. Using a natural experiment from a surprise 2018 legal ruling affecting a subset of the market, I find that bonds in CDOs with low skin in the game are riskier at issuance and become riskier after securitization, but find no evidence of increased at-issuance spreads. These results suggest that other safeguards in the corporate lending market are insufficient to prevent adverse selection in the absence of risk retention requirements.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
