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Corporate Taxes and Securitization by JoongHo Han, Kwangwoo Park, George Pennacchi

Corporate Taxes and Securitization by JoongHo Han, Kwangwoo Park, George Pennacchi. Discussant: Chuan -San Wang Assistant Professor at NTU. Research Question. How corporate income tax creates incentives for banks to securitize ( sell) loans ? Very timing

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Corporate Taxes and Securitization by JoongHo Han, Kwangwoo Park, George Pennacchi

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  1. Corporate Taxes and Securitizationby JoongHoHan, Kwangwoo Park, George Pennacchi Discussant: Chuan-San Wang Assistant Professor at NTU The 6th APMAA Forum, Taipei, Taiwan

  2. Research Question • How corporate income tax creates incentives for banks to securitize (sell) loans? • Very timing • Relevant to recent financial crisis • Innovation • Explain securitization from tax • Gorton and Pennacchi(1995) “Banks and Loan Sales: Marketing Nonmarketable Assets,” Journal of Monetary Economics The 6th APMAA Forum, Taipei, Taiwan

  3. Research Design • Theoretical model • Empirical test The 6th APMAA Forum, Taipei, Taiwan

  4. Major issue 1 • corporate taxation of banks • level of securitizations • default risk of securitized loans • Did corporate taxation of banks (in a particular state) change recently? • If tax rate is positively associated with securitization, the tax rate is a proxy of something else, e.g., like government service The 6th APMAA Forum, Taipei, Taiwan

  5. Major issue 2 • Income of bank >>> need to pay tax • Income of special purpose entity (SPE) >>> free of tax • Bank use more securitization to avoid tax • The benefits are realized when loans are transferred to SPE • Future benefits of interests from loans are capitalized • Securitization cannot avoid tax but risk Taipei, Taiwan

  6. Major issue 3 • Relative importance among other reasons for the growth of loan sales • Comparative advantages • Pennacchi (1988) • Dahiya, Puri and Saunders (2001) • Portfolio management of bank • Demsetz (2000) • Maximize the use of bank reputation • Supervision of the government The 6th APMAA Forum, Taipei, Taiwan

  7. Major issue 4for empirical tests • No variation in tax rate of a state in U.S. • Tax rate ranges from zero to over 10%. • Sample period 2001 through 2008 • Difference in securitization among states • Government supervision • others The 6th APMAA Forum, Taipei, Taiwan

  8. Major issue 5 for Theoretical model • The theoretical model is too complicated to be followed well • Simplicity may be good for this case • Theories, economic intuitions The 6th APMAA Forum, Taipei, Taiwan

  9. Minor issues 1/2 • Introduction: 2 irrelevant paragraphs • poor credit quality, moral hazard • 7 assumptions for the theoretical model can be tedious • Are they consistent with prior studies? • What new economic theories does the theoretical model generate? The 6th APMAA Forum, Taipei, Taiwan

  10. Minor issues 2/2 • 5 Equilibriav.s. 1 proposition • Economic intuition • More discussion on prior theories • Enhance interpretations of the models • Only 1 paragraphof literature review • Perhaps there are limited literature on this topic • Numerous studies in financial accounting The 6th APMAA Forum, Taipei, Taiwan

  11. Interesting and careful study Best wishes for this study Thank you The 6th APMAA Forum, Taipei, Taiwan

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