SFAS 166/167 and the Cost of Equity Capital: Evidence from Banks

• In Event: Banks, Loans, and Goodwill

Abstract

This study examines whether SFAS 166/167, which ended the exclusion from consolidation of qualifying special purpose entities (QSPEs), impacted the cost of equity capital for a sample of banks. This exclusion had previously allowed banks to avoid consolidation of many asset securitization transactions. These types of transactions became increasingly prevalent during and after the financial crisis of the late 2000’s. We compare changes in the cost of equity capital for a treatment sample of banks that consolidated SPEs after implementation of SFAS 166/167 to changes in the cost of equity capital for a control group that reported no material impact from implementation of SFAS 166/167. We find that after SFAS 166/167, the cost of equity capital increased more for the group of banks consolidating previously unconsolidated SPE’s than for the banks that were relatively unaffected by the rule change. Our results suggest that SFAS 166/167 is associated with an increased cost of equity capital since consolidations of former QSPEs and new, expanded disclosures of variable interest entities (VIEs) may increase transparency and improve risk assessments by market participants.

Author

• Qiuhong Zhao, Texas A&M University - Corpus Christi