Monitoring, Liquidation, and Security Design under Securitization

45 Pages Posted: 7 Sep 2007

See all articles by Hiroshi Osano

Hiroshi Osano

Konan University; Kyoto University - Institute of Economic Research; Konan University

Date Written: February 5, 2007

Abstract

This article examines the effect of securitization on the ex ante monitoring and ex post liquidation decisions of the issuer in the context of adverse selection. It characterizes those decisions as explicit functions of observable parameters that are related to securitization. If liquidity requirements lead the issuer to use senior/subordinated security design, the main result is that limited information (unmonitored finance) and soft-budgeting (excessive continuation) problems arise even though neither limited information nor soft-budgeting is socially efficient. The issuer's need for more liquidity is more likely to lead to unmonitored finance and excessive continuation problems. On the other hand, the results indicate that these problems are less likely to be the result of superior monitoring technology and higher liquidation values, and are more likely to be the result of higher asset returns with success. Furthermore, the results suggest that issuers with weaker capital or less liquidity are more likely to securitize their assets. The results provide a number of empirically testable implications relating to the degree of securitization, some of which are consistent with existing empirical evidence.

Keywords: asset-backed securities, liquidation, monitoring, securitization, security design

JEL Classification: D82, G12, G21, G33, L51

Suggested Citation

Osano, Hiroshi, Monitoring, Liquidation, and Security Design under Securitization (February 5, 2007). Available at SSRN: https://ssrn.com/abstract=1011945 or http://dx.doi.org/10.2139/ssrn.1011945

Hiroshi Osano (Contact Author)

Konan University ( email )

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United States
+81-78-431-3024 (Phone)
658-8501 (Fax)

Kyoto University - Institute of Economic Research ( email )

Yoshida-Honmachi
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Kyoto 606-8501
Japan
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Konan University ( email )

Okamoto 8-9-1, Higashinada-ku
Kobe, 658-8501
United States
+81-78-431-3024 (Phone)
658-8501 (Fax)

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