Do Banks Manipulate Loan Origination Activities for Securitization-Based Earnings Management?

In this paper, I hypothesize and provide evidence that commercial banks manipulate loan origination activities for securitization-based earnings management. Using a unique database that contains home mortgage origination information of all commercial banks in the United States, I find that banks increase the origination of the more liquid non-jumbo mortgages for securitization to meet earnings benchmarks. To originate more non-jumbo mortgages, I find two strategies are used by the banks: (1) denying fewer applications and (2) attracting more borrowers to accept the approved applications. I also find that the manipulation has long-term effects. Specifically, I document that the manipulation is negatively associated with future bank profitability and positively associated with buy-and-hold stock returns, which suggests that the manipulation has long-term costs and is viewed as a risky practice by investors.