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Portfolio performance manipulation in collateralized loan obligations

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  • Loumioti, Maria
  • Vasvari, Florin P.

Abstract

We examine the discretionary activities that CLO managers engage in to pass monthly overcollateralization (OC) tests. These tests require a CLO's loan portfolio value, scaled by the CLO notes’ principal balance, to be above a certain threshold. Using CLOs’ granular disclosures, we develop model-free estimates for discretionary loan fair valuation and transaction-based proxies for strategic loan trading. We find a positive association between these discretionary activities and the probability of avoiding an OC test violation. This association varies predictably with junior noteholders’ influence and CLO market conditions. Strategic trading—but not discretionary fair valuation—relates to worse future CLO performance.

Suggested Citation

  • Loumioti, Maria & Vasvari, Florin P., 2019. "Portfolio performance manipulation in collateralized loan obligations," Journal of Accounting and Economics, Elsevier, vol. 67(2), pages 438-462.
    • Handle: RePEc:eee:jaecon:v:67:y:2019:i:2:p:438-462
    DOI: 10.1016/j.jacceco.2018.09.003
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    Cited by:

    1. Angela Gallo & Min Park, 2023. "CLO (Collateralized Loan Obligation) Market and Corporate Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(5), pages 1077-1118, August.
    2. Spyros Papathanasiou & Dimitris Kenourgios & Drosos Koutsokostas & Georgios Pergeris, 2024. "The dynamic connectedness between collateralized loan obligations and major asset classes: a TVP-VAR approach and portfolio hedging strategies for investors," Empirical Economics, Springer, vol. 67(3), pages 1063-1089, September.
    3. John M Griffin & Jordan Nickerson, 2023. "Are CLO Collateral and Tranche Ratings Disconnected?," The Review of Financial Studies, Society for Financial Studies, vol. 36(6), pages 2319-2360.
    4. Elkamhi, Redouane & Nozawa, Yoshio, 2022. "Fire-sale risk in the leveraged loan market," Journal of Financial Economics, Elsevier, vol. 146(3), pages 1120-1147.
    5. Maehashi, Kohei, 2021. "Systemic risk of portfolio diversification," Economics Letters, Elsevier, vol. 208(C).

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    More about this item

    Keywords

    Collateralized loan obligation; CLO; Securitization; Managerial discretion; Loan fair valuation; Strategic loan trading;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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