Two Essays On Corporate Governance Asset Securitization And Accounting Misstatement In The Banking Industry

"This dissertation consists of two essays that address important questions related to corporate governance and financial reporting in the banking industry. The first essay investigates why and how bank-level shareholder rights affect the quality of loans originated for securitization. Poor loan securitization has been blamed for the financial crisis. But why so many risky loans were originated for securitization remains an unsettled question. In this study, I attempt to address this question from a corporate governance angle. Focusing on a sample of securitization activities that involve less risk transfer, I find that banks with strong shareholder rights originate poor quality loans to securitize and experience large nonperforming and charge-off in securitized loans. This association is more pronounced in banks that have large and non-management shareholders. In addition, the negative impact of shareholder rights on the quality of securitized loans is also found to be more strengthened in banks that have larger information asymmetry between managers and shareholders. Lastly, banks with the highest shareholder rights pre-crisis are found to suffer the largest losses in securitized loans during the financial crisis. Overall, the evidence supports the view that stronger shareholder rights that impose intense pressure on managers encourage the origination and securitization of riskier loans. Hence, the failure of securitization is likely due to a failure of banks' internal governance, and there could be a potential negative consequence of having powerful shareholders in banks. These findings should provide insights into the ongoing regulatory reform with regard to rebuilding corporate governance mechanisms for financial institutions.The second essay investigates the characteristics of banks that are likely to misstate their financial statements. There has been an extensive amount of research studying the determinants of financial misreporting in the non-financial industry. However, very little work has been done as to what causes financial institutions to manage their earnings, and how we can best detect accounting misstatements in banks. The objective of this paper is to analyze the characteristics of misstating banks and develop a model to predict misstatements in the banking industry. Using a sample of 247 banks that had accounting restatements, I find that banks with financial misstatements have larger abnormal loan loss provisions, abnormal securitization income, and are more likely to engage in securitization business. I also find that managers are more likely to conduct accounting manipulations when there is underperformance, a demand to raise external financing, or a high leverage ratio. Furthermore, banks involved in more complicated business are found to face a higher likelihood of having misstatements. Together, my evidence suggests that bank managers use the discretions in loan loss provisions and securitization accounting estimates to manage financial numbers, and the key motivating factors for accounting manipulations are deteriorating performance and capital market pressure. Finally, a scaled logistic probability (B-score) is derived from the prediction model, which can be used to help investors, auditors or regulators to identify accounting misstatements in the banking industry." --