Flora F. Niu
University of Waterloo
Abstract: This study examines the reliability of the financial-components approach under FAS125 for transferring financial assets. Using a sample of US public companies, I document a positive association between the constructed off-balance sheet risk proxy and the market risk measure, incremental to traditional measures of leverage. The evidence is consistent with the hypothesis that the financial-components approach is not reliable enough to adequately capture the risk creating effect of implicit recourse obligations from the transfers. Additional analyses, however, assessing financial statement information across the pre and post-FAS125 regimes suggest that the financial-components approach is more capable of reflecting the market's perception of the effects of securitization on equity risk; also, the recognized gains from securitization have a higher valuation multiplier in the post-FAS125 period, than in the pre-FAS125 period. Collectively, these results raise questions about the reliability of the financial-components approach, although FAS125 does represent a refinement compared to prior regulations.
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