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Review of Financial Studies Vol. 33 No. 11 2020

Informational Efficiency in Securitization after Dodd-Frank

Sean J. Flynn1; Andra C. Ghent2; Alexei Tchistyi3

1 College of Business, Colorado State University · 2 Kenan-Flagler Business School, University of North Carolina, Chapel Hill · 3 Gies College of Business, University of Illinois at Urbana–Champaign

Abstract

We analyze how Dodd-Frank-mandated risk retention affects the information investors extract from issuers’ retention choices in the CMBS market. We show that the required retention level is both binding and stringent. Although this implies issuers cannot signal using the level of retention, we provide a model showing that signaling can occur by varying the retention structure. The model is consistent with spreads being empirically lower in deals with a purely first-loss retention structure. A stated concern of rulemakers is asymmetric information. However, we show that, post-crisis, the level of asymmetric information in this market is quite low.

DOI
10.1093/rfs/hhaa003
Volume
33
Issue
11
Pages
5131-5172
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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