Journal of Financial Economics Vol. 134 No. 2 2019
Does skin-in-the-game affect security performance?
Abstract
This paper documents that complex financial innovations like collateralized debt obligations (CDOs) enabled informed parties in the commercial mortgage-backed securitization pipeline to reduce their skin-in-the-game in a way not observable to other market participants. This reduction in first-loss security retention significantly impacted the probability that more senior tranches ultimately defaulted. We show that this performance is entirely driven by the amount of first-loss sold to (affiliated) CDOs within 12 months of the commercial mortgage-backed securities (CMBS) deal. Our result is robust to using the differential access of first-loss investors to CDO funding as an instrument to identify exogenous variations in the retention of first-loss securities.
- DOI
- 10.1016/j.jfineco.2019.04.009
- Volume
- 134
- Issue
- 2
- Pages
- 333-354
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref