TY  - JOUR
AU  - Merrill,Craig B.
AU  - Nadauld,Taylor D.
AU  - Stulz,René M.
AU  - Sherlund,Shane
TI  - Did Capital Requirements and Fair Value Accounting Spark Fire Sales in Distressed Mortgage-Backed Securities?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 18270
PY  - 2012
Y2  - August 2012
UR  - http://www.nber.org/papers/w18270
L1  - http://www.nber.org/papers/w18270.pdf
N1  - Author contact info:
Craig B. Merrill
Department of Finance
Brigham Young University
Provo, UT 84602-3113
E-Mail: Craig_Merrill@byu.edu

Taylor D. Nadauld
Department of Finance
Brigham Young University
Provo, Utah 84602
E-Mail: taylor.nadauld@byu.edu

Rene M. Stulz
The Ohio State University
Fisher College of Business
806A Fisher Hall
Columbus, OH 43210-1144
Tel: 614/292-1970
Fax: 614/292-2359
E-Mail: stulz_1@cob.osu.edu

Shane Sherlund
Federal Reserve Board
Mailstop 93
20th and C Streets, NW
Washington, DC, 20551
E-Mail: shane.m.sherlund@frb.gov
AB  - Much attention has been paid to the large decreases in value of non-agency residential mortgage-backed securities (RMBS) during the financial crisis. Many observers have argued that the fall in prices was partly driven by decreased liquidity and fire sales. We investigate whether capital requirements and accounting rules at financial institutions contributed to the selling of RMBS at fire sale prices.  For financial institutions subject to credit-sensitive capital requirements, capital requirements increase as an asset’s credit becomes impaired. When accounting rules require such an asset’s value to be marked-to-market and the fair value loss to be recognized in earnings, a capital-constrained firm can improve its capital position by selling the credit-impaired asset even if it has to accept a liquidity discount to do so. Using a sample of 5,014 repeat transactions of non-agency RMBS by insurance companies from 2006 to 2009, we show that insurance companies that became more capital-constrained because of operating losses (uncorrelated with RMBS credit quality) and also recognized fair value losses sold comparable RMBS at much lower prices than other insurance companies during the crisis.
ER  -