Are Securitizations in Substance Sales or Secured Borrowings? Capital‐Market Evidence*

Two standard‐setting approaches have emerged globally to guide the choice of accounting for securitizations: the control and components approach (SFAS No. 125 and SFAS No. 140) and the risks and rewards transfer approach (IAS No. 39). A lack of consensus about derecognition accounting is a major impediment to achieving convergence in global standards that must be resolved. Thus, both SFAS No. 140 and IAS No. 39 will be reexamined, and evidence pertinent to the debate is timely and important. In this study, we present evidence consistent with the view of credit‐rating analysts, who view many securitizations as, in substance, secured borrowings. Specifically, for a sample of originators applying sale accounting guidance in SFAS No. 125 / 140 during the period 1997‐2003, we show that off‐balance‐sheet debt related to securitizations has, on average, the same risk‐relevance for explaining market measures of risk (that is, CAPM beta) as on‐balance‐sheet debt. We also find that, in a returns and earnings association framework, the pricing multiple on securitization gains declines as the amount of off‐balance‐sheet debt increases, implying that investors take off‐balance‐sheet debt into account when assessing the valuation‐relevance of such gains. For those who advocate the control and components approach to securitization accounting, our results suggest that, at least for frequent securitizers, the put option arising from implicit recourse is a “missing piece” that is not currently accounted for when calculating securitization gains. Our results challenge the extant measurement standards in SFAS No. 140.     

Blocked-Error-R 2: A Conceptually Improved Definition of the Proportion of Explained Variance in Models Containing Loops or Correlated Residuals

Bentler and Raykov (2000, Journal of Applied Psychology 85: 125–131), and Jöreskog (1999a, http://www.ssicentral.com/lisrel/column3.htm, 1999b http://www.ssicentral. com/lisrel/column5.htm) proposed procedures for calculating R ² for dependent variables involved in loops or possessing correlated errors. This article demonstrates that Bentler and Raykov’s procedure can not be routinely interpreted as a “proportion” of explained variance, while Jöreskog’s reduced-form calculation is unnecessarily restrictive. The new blocked-error-R ² (beR ²) uses a minimal hypothetical causal intervention to resolve the variance-partitioning ambiguities created by loops and correlated errors. Hayduk (1996) discussed how stabilising feedback models – models capable of counteracting external perturbations – can result in an acceptable error variance which exceeds the variance of the dependent variable to which that error is attached. For variables included within loops, whether stabilising or not, beR ² provides the same value as Hayduk’s (1996) loop-adjusted-R ². For variables not involved in loops and not displaying correlated residuals, beR ² reports the same value as the traditional regression R ². Thus, beR ² provides a conceptualisation of the proportion of explained variance that spans both recursive and nonrecursive structural equation models. A procedure for calculating beR ² in any SEM program is provided.     

Religion, longevity, and cooperation: The case of the craft guild

When the mortality rate is high, repeated interaction alone may not sustain cooperation, and religion may play an important role in shaping economic institutions. This insight explains why during the fourteenth century, when plagues decimated populations and the church promoted the doctrine of purgatory, guilds that bundled together religious and occupational activities dominated manufacturing and commerce. During the sixteenth century, the disease environment eased, and the Reformation dispelled the doctrine of purgatory, necessitating the development of new methods of organizing industry. The logic underlying this conclusion has implications for the study of institutions, economics, and religion throughout history and in the developing world today.     

Optimised asset replacement strategy in the presence of lead time uncertainty

This paper develops an optimal replacement strategy for capital intensive equipment with long delivery lead time. The strategy is based on an extended version of the real options approach to repeated replacement decisions, in which the goal is to determine the operating cost and delivery lead-time conditions upon which a replacement should be ordered.The real options approach to capital replacement problems is superior to traditional net present value (NPV) approaches, as it values of the option to adapt decisions based on current (rather than predicted) system conditions. However, previous applications of the real options approach to repeated replacement have not considered the impact of long and uncertain lead times, and have therefore focused on when to replace rather than when to order. Delivery lead times are an important consideration in an expanding mining sector in which demand for heavy mobile equipment (HME) exceeds the capacity of suppliers to provide the equipment in a timely manner.The inclusion of a lead time element results in a decision with an “option” period and an “option-less” period. Simulations are used to demonstrate the improved outcome of real options based replacement strategies compared with those derived using a traditional NPV approach, both with and without lead times. Further the performance of the order placement strategy with different boundary conditions, bounded and reflecting, is explored. No appreciable difference in performance of these strategies was identified. The optimal order placement strategy incorporating delivery lead times is displayed on a simple chart which is accessible to fleet management personnel.     

Identity, appropriateness and the construction of regulatory space: the formation of the Public Accountant's Council of Ontario

Practice rights legislation in Canada continues to be contested 50 years after its first enactment. In Ontario, one of the earliest provinces to enact restrictive legislation, the challenges have focused on how the legislation has been implemented rather than on whether or not public accounting should be regulated. To better understand the contested issues in this field, we examine the process undertaken by the Public Accountants Council of Ontario to implement the Public Accountancy Act of 1950. Our analysis is based on the first 15 years of the minutes of the meetings of the Public Accountants Council for Ontario, augmented by other archival sources such as court cases, newspaper clippings, correspondence and reports. Our intent is to document the process and “logic of appropriateness” used by the Council to construct its identity and stake out its “regulatory space” in the face of the ambiguity of the law and pressure from interest groups. We also identify the contradictions that were institutionalized in this field resulting in repeated challenges to the Council. We conclude by relating the historical insights from this analysis to the continuing challenges to practice rights legislation in Ontario.     

The Effects of Outside Directors and Board Shareholdings on the Relation Between Chief Executive Compensation and Firm Performance

Critics of corporate governance have suggested that improvements in board monitoring will arise from more independent boards consisting of outside directors and from increased stock ownership by directors. Presumably these changes should result in more rational, more defensible compensation decisions in which pay is clearly tied to results. In this paper, we test the premise that boards with a relatively higher proportion of outsiders and boards with significant shareholdings maintain a closer link between corporate performance and executive pay than do boards with fewer outsiders and boards holding little stock. The results of the study, based on a sample of 268 large corporations, are mixed. As expected, boards with significant shareholdings maintain a stronger linkage between compensation and firm-level performance. This finding persists even after controls are included for CEO and outsider shareholdings. Contrary to expectations, however, evidence was not found that firms with a higher proportion of outsiders on the board of directors relate compensation more strongly to firm results.