Abstract
In this paper, we investigate whether securitization was associated with risky lending in the corporate loan market by examining the performance of individual loans held by collateralized loan obligations. We employ two different data sets that identify loan holdings for a large set of CLOs and find that adverse selection problems in corporate loan securitizations are less severe than commonly believed. Using a battery of performance tests, we find that loans securitized before 2005 performed no worse than comparable unsecuritized loans originated by the same bank. Even loans originated by the bank that acts as the CLO underwriter do not show under-performance relative to the rest of the CLO portfolio. While some evidence exists of under-performance for securitized loans originated between 2005 and 2007, it is not consistent across samples, performance measures, and horizons. Overall, we argue that the securitization of corporate loans is fundamentally different from securitization of other assets classes because securitized loans are fractions of syndicated loans. Therefore, mechanisms used to align incentives in a lending syndicate are likely to reduce adverse selection in the choice of CLO collateral.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 91-113 |
| Number of pages | 23 |
| Journal | Journal of Financial Economics |
| Volume | 106 |
| Issue number | 1 |
| DOIs | |
| State | Published - Oct 2012 |
Funding
We thank Darrell Duffie, Paul Gompers, Jeremy Stein, Greg Nini, Gary Gorton, Charlotte Ostergaard, Amit Seru, James Vickery, Paul Willen, seminar participants at Harvard University, the Federal Reserve Board, Federal Reserve Bank of New York, University of North Carolina, London School of Economics, Wharton School at the University of Pennsylvania, University of Florida, Berkeley, National Economic Research Associates, the World Bank, and the Brattle Group, and participants at the American Finance Association annual meeting, the Yale Financial Crisis Conference, and the Financial Intermediation Society annual meeting, and especially an anonymous referee and the editor (Bill Schwert) for helpful comments. Jessica Dias and Kate Waldock provided excellent research assistance. We acknowledge research support from the Division of Research at Harvard Business School. Benmelech is grateful for financial support from the National Science Foundation under CAREER award SES-0847392. We are especially grateful to the Loan Syndications & Trading Association and Markit for assisting us with secondary market loan prices and credit default swap data.
Keywords
- CDOs
- Collateralized loan obligations (CLOs)
- Structured finance
- Syndicated loans
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics
- Strategy and Management