Catherine Shakespeare

The Causes and Consequences of Internal Control Problems in Nonprofit Organizations

This study examines the causes and consequences of internal control deficiencies in the nonprofit sector using a sample of 27,495 public charities from 1999 to 2007. We first document that the likelihood of reporting an internal control problem increases for nonprofit organizations which are in poor financial health, growing, more complex, and/or smaller. We then present evidence that the disclosure of weak internal controls over financial reporting is negatively associated with subsequent donor support received after controlling for the current level of donor support and other factors influencing donations. We likewise report a negative association between internal control problems and subsequent government grants. Our results suggest that donors and government agencies, important sources of capital for nonprofit organizations, react either directly or indirectly to internal control information.

Are Asset Securitizations Sales or Loans

This study addresses whether asset securitizations are really asset sales or a form of secured borrowing, by estimating cross-sectional equity valuation regressions to assess whether the stock market treats securitized assets and liabilities held by a special purpose entity (SPE) as assets and liabilities of the sponsor-originator (S-O). Overall, we find that the market views the SPE assets and liabilities as belonging to the S-O, i.e., the risk and rewards of ownership of the transferred assets reside with the S-O and not the SPE. Results from a boot-strapping simulation that controls for scale by randomly assigning SPE assets and liabilities from one S-O to another provide evidence that scale bias is an unlikely explanation for finding the market views SPE assets and liabilities as belonging to the S-O. Findings from specifications in which we permit coefficients to differ for S-O firms with high and low relative levels of retained interest indicate that whereas the market views asset securitizations by low retained interest S-O firms as sales, i.e., risk transfer has taken place, it views asset securitizations by high retained interest S-O firms as secured borrowings, i.e., risk transfer is incomplete. We also show that although the market views securitizations by regulated and unregulated S-Os as secured borrowing, there is suggestive evidence that regulated firms have greater incentives to use securitizations to achieve off-balance sheet financing. .

Market Reaction to Securitization Retained Interest Impairments during the Financial Crisis of 2007-2008: Are Implicit Guarantees Worth the Paper They’re Not Written On?

The collapse of the securitization market during the 2007-2008 Financial Crisis resulted from investors’ concern with the value of securitized assets and securities issued by special purpose entities (SPEs). Research has shown that prior to the Crisis, investors valued equity of sponsor-originator banks (S-Os) as if there were an implicit guarantee extended to SPE creditors that would be fully honored. We predict that the Crisis caused investors to value S-O equity as if such guarantees would not be honored. We test this prediction in two ways: by estimating cross-sectional equity valuation models for banks before and during the Financial Crisis, and by testing for changes in various market metrics in response to retained interest writedown events during the Financial Crisis. The valuation tests reveal that whereas prior to the Crisis SPE debt and equity was valued similarly to S-O debt and equity, this relation ceased to hold after the Crisis unfolded. The event study results reveal an increase in trading volume, equity volatility, and spread when retained interest writedowns are announced, which is consistent with the market viewing such events as providing significant, but ambiguous information regarding whether S-Os would honor their implicit guarantees. Additional analyses reveal that investor reaction is concentrated among those S-Os where there is ambiguity as to whether they will honor their implicit guarantees.

A Pecking Order Response to Regulatory Uncertainty: Evidence from Basel III

This paper examines how firms respond to proposed regulation. Specifically, we utilize the time period that banking authorities used to discuss, adopt, and implement Basel III to examine how quickly firms adjusted their financial reporting and/or business model decisions in response to the proposed regulatory framework. We find evidence that banks altered their business models and made strategic financial reporting changes before regulators even agreed on the final regulatory terms. We also provide evidence that banks were more likely to make these anticipatory changes when they: 1) benefitted more from signaling an early commitment, or 2) had less uncertainty about whether they would be subjected to the regulation. While prior research generally assumes that firms follow a sequential pecking order approach when faced with regulatory uncertainty, our findings suggest that firms’ incentives may lead them to lobby against a proposed regulation while simultaneously making costly operational and financial reporting changes to comply with it.

Responding to Regulatory Uncertainty: Evidence from Basel III

This paper examines how firms respond to proposed regulation. Specifically, we utilize the time period that banking authorities used to discuss, adopt, and implement Basel III to examine how quickly firms adjusted their financial reporting and/or business model decisions in response to the proposed regulatory framework. We find evidence that banks altered their business models and made strategic financial reporting changes before regulators even agreed on the final regulatory terms. We also provide evidence that banks were more likely to make these anticipatory changes when they: 1) benefitted more from signaling an early commitment, or 2) had less uncertainty about whether they would be subjected to the regulation. While prior research generally assumes that firms follow a sequential pecking order approach when faced with regulatory uncertainty, our findings suggest that firms’ incentives may lead them to lobby against a proposed regulation while simultaneously making costly operational and financial reporting changes to comply with it.

Responding to Regulatory Uncertainty: Evidence from the Proposed Basel III Rules on Mortgage Servicing Rights

This paper examines how firms respond to proposed regulation. Specifically, we utilize the time period that banking authorities used to discuss, adopt, and implement Basel III to examine how quickly firms adjusted their financial reporting and/or business model decisions in response to the proposed regulatory framework. We find evidence that banks altered their business models and made strategic financial reporting changes before regulators even agreed on the final regulatory terms. We also provide evidence that banks were more likely to make these anticipatory changes when they: 1) benefitted more from signaling an early commitment, or 2) had less uncertainty about whether they would be subjected to the regulation. While prior research generally assumes that firms follow a sequential pecking order approach when faced with regulatory uncertainty, our findings suggest that firms’ incentives may lead them to lobby against a proposed regulation while simultaneously making costly operational and financial reporting changes to comply with it.