Securitizations and accounting restatements

Haiping Wang and Jing Zhang

Asian Review of Accounting, 2018, vol. 26, issue 4, 571-594

Abstract: Purpose - The purpose of this paper is to establish a direct link between securitizations and accrual-based earnings management by investigating whether financial statements in the periods of securitizations are more likely to be restated at a later time. In addition, this study examines whether the association between securitization and accounting restatements is more pronounced in the pre-financial crisis period and for banks with less independent or industry-specialized auditors. Design/methodology/approach - This study covers a sample of bank holding companies with restatement information between 2001 and 2012. Using the incidence of material accounting restatements as a proxy for accrual earnings management, this study investigates whether securitizations are likely used as a tool for accrual earnings management. A logistic model is applied with standard errors clustered at the firm-year level. Various robustness tests are conducted to rule out the possibilities that the results are driven by unintentional reporting errors or endogeneity of the securitization decisions. Findings - The empirical results reveal a positive and significant association between banks’ securitization activities and the likelihood of having accounting restatements. Moreover, this positive association is more pronounced in the pre-financial crisis period and for banks with less independent or industry-specialized auditors. Research limitations/implications - The findings suggest that managers take advantage of discretions on accounting rules for securitizations to manage earnings. This evidence provides multi-dimension implications for standard setters and practitioners, as well as investors. Originality/value - This is one of the very first papers to document evidence that accrual earnings management is involved in securitization.

Keywords: Banks; Financial crisis; Accounting restatements; Auditor industry specialization; Auditor independence; Securitizations (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eme:arapps:ara-10-2017-0151

DOI: 10.1108/ARA-10-2017-0151

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