Asset Securitizations and Stock Price Crash Risk : Evidence from Nonfinancial Firms

This study examines the relation between asset-backed securitizations and future stock price crash risk in nonfinancial firms. We argue that the off-balance sheet treatment of securitizations facilitates managers’ bad news hiding, leading to higher crash risk. Using a large sample of U.S. nonfinancial firms, we find that firms engaging in off-balance sheet securitizations are associated with higher crash risk, especially for firms with weaker internal governance and firms with higher bonus incentives. In 2010, the Financial Accounting Standard Board implemented SFAS 166/167 to tighten the criteria for securitization transactions to receive off-balance sheet treatment. However, our difference-in-differences analysis shows no significant effect of SFAS 166/167 on reducing securitizing firms’ crash risk. Further analyses reveal that firms engaging in off-balance sheet securitization before SFAS 166/167 conducted more real activity-based earnings management after SFAS 166/167. This evidence suggests that firms could continue to hide bad news through alternative channels as substitutes