Meeting Analysts\u27 Forecasts through Securitization, and Value Relevance of Securitization: A Global Perspective

Based on a sample of 71 companies that follow U.S. GAAP and 41 companies that follow IFRS for the period between 2005 and 2010, Iexamine: a) the impact of different approaches in accounting standards, FASB Statement 140 (control-based) and IAS 39 (risk-based approach),on earnings management (measured by meeting/beating analysts\u27 forecast) using fair-value accounting in securitization transactions; b) the association between securitization gain and change in the value-relevance of an accounting performance measure, return on equity (ROE); c) the association between securitization gain and earnings management after controlling for the components of a firm\u27s competitive advantage; d) the joint effect of IFRS and the level of investor protection on earnings management using securitization transactions.I use multivariate linear regression and nonlinear Logit models with panel and cross-sectional data. My contributions to the literature are: a) I shed light on the controversy about fair-value accounting in relation to securitization; b) in relation to FASB Statement 140 (FASB ASC 860) and IAS39, I provide evidence to support the idea of convergence of accounting standards; c) I show that IFRS is effective under any level of investor protection. To the best of my knowledge, these issues are not addressed in prior studies.For companies following U.S. GAAP, I show evidence of earnings management for the period 2005-2006 (before the financial crisis of 2007). However, my results show that the discount rate is not used for manipulating fair value of retained interest (partial interest in secured assets), and there is no positive relationship between securitization gain and competitive advantage of any time period. Also there is no indication of earnings management for the 2008-2009 period.I find that the IFRS regulations associated with securitization are intense and reduce the extent of earnings management under any level of investor protection. Furthermore, my findings show that in the first two periods, 2005-2006 and 2008-2009, companies that operate under strong anti-director laws experience higher securitization gain. It appears that securitization market is more efficient in countries where investors are granted more power to exercise their rights. Lastly, the results do not show any change in the value-relevance of retained on equity