The Economic Consequences of SFAS 166/167 – Evidence from Banks

This study examines whether SFAS 166/167 eliminating the exclusion of consolidation for qualifying special purpose entities (QSPEs) impacted the cost of equity capital for a sample of banks. This exclusion previously allowed banks to avoid consolidation of many asset securitization transactions, and these types of transactions become 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 firms that consolidated special purpose entities 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 firms consolidating previously unconsolidated SPE's than for the firms that were relatively unaffected by the rule change. In sum, the results suggest that SFAS 166/167 resulted in an increased cost of equity capital as the consolidations of former QSPEs and expanded disclosures of VIEs as a consequence of the revised standards might convey new risks to the market, while SFAS 166/167 might improve the transparency of information regarding QSPEs