Regulatory capital and earnings management in banks: The case of loan sales and securitizations

In this dissertation, I examine whether banks use loan securitizations in managing accounting information for regulatory purposes and whether bank managers' private information is detectable in gains from securitizations. Recent changes in the accounting for loan transfers have allowed securitizations with certain forms of retained interests to be accounted for as sales. Securitizations that are accounted for as sales affect shareholder's equity by allowing capitalization of expected future income. My analysis suggests that banks use gains from securitizations to affect both regulatory capital and earnings after controlling for other motivations to securitize loans. The gains can be attributed both to loan selection and to overvaluation of retained interests. I also find that unexpected gains from securitization contain negative news. Quarterly net income declines following unexpected gains, and unexpected gains by higher-capitalized banks are more negatively associated with excess returns than those by lower-capitalized banks.