Why are Securitization Issues Tranched?

Securitizations usually involve creating multiple tranches of a single issue with different characteristics which are sold as separate securities. This paper provides the first systematic testing of theoretical explanations of the extent and nature of tranching using a proprietary and comprehensive database of over 5000 separate tranches of European securitizations raising a total of $1 trillion. We find increasing use of tranching through our sample period, and support for asymmetric information and market segmentation explanations for tranching. We also show that tranching can increase prices for the issue as a whole