Asset securitization by non-financial firms [electronic resource] : motivation and market valuation

This dissertation examines several research questions relating to securitization by non-financial firms. Finance theories suggest securitization is most beneficial when there is high demand for liquidity. On the other hand, empirical studies have shown that firms engage in securitization to manage earnings. I find that liquidity demand, not the incentive for earnings management motivates securitization transactions by non-financial firms. I also evaluate whether earnings management in securitization is indeed undesirable from a shareholder's perspective by examining the economic consequences of the practice. Because securitization creates a large infusion of cash, one way to evaluate the economic consequences of earnings management is to examine whether securitization proceeds encourage overinvestment. I find that earnings management in securitization (i.e., recording non-zero securitization income) is unrelated to firms' suboptimal) overinvestment in the post-securitization period. Thus, it appears that earning management in securitization has no negative economic consequence in terms of generating excess securitization proceeds that encourage overinvestment. I also examine the market's valuation of securitizable assets in the accrual components of earnings and the use of securitization proceeds. Because securitizable assets can be converted into cash through securitization, I test whether the market valuation reflects the source of liquidity in securitizable assets that is similar to the cash component of earnings. I find that, for securitization firms, the market valuation of securitizable assets is similar to that of the cash component of earnings.