Altering Investment Decisions to Manage Financial Reporting Outcomes: Asset‐Backed Commercial Paper Conduits and FIN 46 |
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| Authors: | DANIEL A. BENS STEVEN J. MONAHAN |
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| Affiliation: | 1. University of Arizona, Eller College of Management;2. INSEAD–Accounting and Control Area. The authors gratefully acknowledge financial support from the Ratoff Family Fellowship at the University of Arizona and the INSEAD Alumni fund. Moody's Investors Service graciously provided us with invaluable data on ABCP conduits. We appreciate the institutional insights provided by Thomas Bridges (Federal Reserve), Valerie Jorgenson (Bank of America), Whit McDowell (Bank of America), Deborah Seife (Fitch Ratings), and Deborah Toennies (J.P. Morgan). We also benefited from comments and suggestions provided by an anonymous referee, Ray Ball, Mary Barth, Anne Beatty, Phil Berger, Merle Erickson (the editor), Bob Holthausen, Anil Kashyap, Randy Kroszner, Karen Nelson, Sam Peltzman, and workshop participants at the 2005 Utah Winter Accounting Conference, the University of Arizona, the University of Chicago, Notre Dame, Ohio State, and Tilburg University. Jason Crowl, Geraldine Lor, and Rohit Singh provided valuable research assistance. The authors are solely responsible for any errors. |
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| Abstract: | We evaluate the manner in which sponsors of highly leveraged asset‐backed commercial paper (ABCP) conduits responded to Financial Accounting Standards Board Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities an Interpretation of ARB No. 51, and its Canadian counterpart Accounting Standards Board of Accounting Guideline 15 (AcG‐15), Consolidation of Variable Interest Entities. By matching commercial paper investors with corporations seeking liquidity, ABCP sponsors facilitate a significant amount of short‐term, securitized financing in the United States. FIN 46 and AcG‐15 require sponsors to consolidate their ABCP conduits with their financial statements. We demonstrate that the volume of ABCP began to decline when FIN 46 was first proposed, and that this decline is primarily attributable to a reduction in North American banks' sponsorship of ABCP. We also demonstrate that North American banks entered into costly restructuring arrangements to avoid having to consolidate their conduits per the new accounting standards. Our results suggest that, in certain settings, accounting standards appear to have real effects on investment activity and product‐market competition. |
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