Does skin-in-the-game affect security performance?

Adam B Ashcraft, Kunal Gooriah and Amir Kermani

Journal of Financial Economics, 2019, vol. 134, issue 2, 333-354

Abstract: This paper documents that complex financial innovations like collateralized debt obligations (CDOs) enabled informed parties in the commercial mortgage-backed securitization pipeline to reduce their skin-in-the-game in a way not observable to other market participants. This reduction in first-loss security retention significantly impacted the probability that more senior tranches ultimately defaulted. We show that this performance is entirely driven by the amount of first-loss sold to (affiliated) CDOs within 12 months of the commercial mortgage-backed securities (CMBS) deal. Our result is robust to using the differential access of first-loss investors to CDO funding as an instrument to identify exogenous variations in the retention of first-loss securities.

Keywords: Collateralized debt obligations; Risk retention; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D82 G14 G20 G32 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:134:y:2019:i:2:p:333-354

DOI: 10.1016/j.jfineco.2019.04.009

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