Did FAS 166 and FAS 167 Improve the Transparency of Securitising Banks?

This study investigates whether changes in mandated Financial Accounting Standards No. 166 and 167 (FAS 166 and FAS 167) improved the transparency of securitising banks. I use a dierence-in-dierences research design that compares four measures of information uncertainty (dispersion in analysts' earnings forecasts, implied volatility, stock illiquidity, and bid-ask spread) in the pre- versus post-FAS 166 and FAS 167 periods for securitising versus non-securitising banks. I predict and find that information uncertainty of securitising banks decreases from the pre- to the post-FAS 166 and FAS 167 periods compared to non-securitising banks. I also show that information uncertainty of securitising banks decreases more from the pre- to the post-FAS 166 and FAS 167 periods with their involvements with variable interest entities and implicit recourse practice. I exploit the later timing of the issuance of FAS 166 and FAS 167 than the financial crisis of 2007-2009 to rule out the confounding effects of the crisis. I conclude that FAS 166 and FAS 167 have improved the transparency of securitising banks' reporting. This study is the first to provide evidence for the disclosure and accounting implications of FAS 166 and FAS 167 for securitisations and banks' transparency.

This seminar is organised by the Erasmus Accounting Research Group.