Asset-Level Transparency and the (E)Valuation of Asset-Backed Securities

Effective as of November 23, 2016, SEC Regulation (“Reg”) AB II requires issuers of certain types of asset-backed securities (“ABS”) to disclose information about the credit-risk attributes of each asset in the underlying pool. The prior Reg AB required issuers to disclose only pool-level summary statistics for individual credit-risk attributes. We examine how ABS issuers' asset-level disclosures under Reg AB II affect the (e)valuation of ABS by investors and credit rating agencies. Using difference-in-differences models that compare affected and unaffected types of ABS, we find that asset-level disclosures lead to initial ABS yields and credit ratings that better predict the subsequent performance of the underlying assets, consistent with these disclosures improving yield informativeness and credit rating quality. These results are concentrated in deals with above-median risk layering in the underlying assets, for which the disclosures previously provided under Reg AB were less informative, and in deals with above-median complexity in the tranching of credit risk. We further find that asset-level disclosures are associated with lower yields, consistent with transparency lowering ABS issuers' cost of capital. Lastly, we provide direct evidence that most prospective ABS investors download asset-level information from EDGAR during the price formation period prior to ABS issuance