Corporate Taxes and Securitization by JoongHo Han, Kwangwoo Park, George Pennacchi Discussant: Chuan-San Wang Assistant Professor at NTU The 6th APMAA Forum, Taipei, Taiwan

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

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

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

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

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

Major issue 4 for 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

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

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

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

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