Securitization and Accounting Quality: Evidence from Collateralized Loan Obligations

Abstract

Using a large sample of collateralized loan obligation (CLO) portfolios, we examine the role of borrowers’ accounting quality in corporate loan securitization. We find that loans from companies with higher ex-ante accounting quality are more likely to be purchased and securitized by CLOs. Further analyses show that such a positive association is mainly due to the role of accounting information in alleviating the adverse selection problem in the pre-securitization period. We also examine the role of accounting information in the post- securitization period. Using the state tax rate as an instrument for securitization, we find that accounting information does not affect the default sensitivity to CLO ownership, suggesting that CLOs do not utilize accounting information in the ex-post monitoring. Overall, our findings suggest that CLOs exert great effort and care in screening during the origination phase, but have limited incentives and the ability to monitor ex post.