Securitization and Accounting Restatements

Abstract

This study investigates whether accounting misstatements are more or less likely to happen during the period when securitization is heavily conducted. Prior studies on securitization reporting have expressed concern that securitization can be used for earnings management, however, have not yet distinguished whether the earnings management is from the discretion on when and which assets to securitize or from the discretion in securitization measurements. Using a sample of bank holding companies from 2001 to 2012, I consistently find a positive and significant association between banks’ engagement in securitization and the likelihood of having an accounting restatement. Moreover, this positive association is most pronounced in the pre-financial crisis period, or in banks which securitize low quality loans. I provide various robustness tests and suggest that my results are not driven by the non-securitization-related earnings management, the unintentional reporting error, or endogeneity of securitization decision. Overall, the consistent explanation for my findings is that managers intentional misuse accounting estimates of securitization for earnings management. This is one of the very first papers which document the evidence of accrual earnings management through securitization reporting.