Do Managers Time Securitization Transactions to Obtain Accounting Benefits?

Preprint
Publisher Website
Google Scholar
Abstract
Relative to recording securitizations as collateralized borrowings, the "gain on sale" treatment allowable under SFAS 125/140 has several accounting benefits such as reducing leverage, increasing profits, and improving efficiency ratios. We argue that to maximize these accounting benefits managers will want to engage in securitizations at the end of the quarter. We document that securitization transactions occur with greater frequency in the last few days of the third month of the quarter. We also find that the end-of-quarter effect is stronger after the introduction of SFAS 125 that made it easier for firms to meet criteria for "gain on sale" treatment. We provide various robustness tests that suggest that the clustering is not due to the demand for the underlying assets, demand for financing, or a decision on the part of firms to systematically perform securitizations at month-end. Overall the consistent explanation for our findings is that flexibility to window-dress the financial statements is an attractive side benefit of engaging in securitizations.