The Dark Side of Specialization: Evidence from Risk Taking by CDO Collateral Managers

Sergey Chernenko
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Sergey Chernenko: OH State University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: I study the incentives and performance of CDO collateral managers, asset management firms responsible for the selection of collateral in ABS CDOs that figured prominently in the 2007-2008 financial crisis. Specialized asset managers with few reputational concerns invest in riskier collateral and gain market share at the expense of more diversified investment managers. Controlling for observable deal characteristics, the IRR of specialized managers' CDOs is 5.8% lower. The results cannot be explained by greater optimism or lower expertise of specialized managers. Deals of specialized managers have smaller equity tranches and invest in higher yielding collateral securities from more recent vintages. This collateral suffers significantly larger losses, even controlling for at-issuance rating and spread. The results point to greater risk taking incentives as one downside of specialization in asset management.

JEL-codes: G01 G23 G32 (search for similar items in EconPapers)
Date: 2015-07
New Economics Papers: this item is included in nep-cfn, nep-ger and nep-hrm
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2015-12

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