Going for Broke: Underwriter Reputation and the Performance of Mortgage-Backed Securities

Department: Finance

Intervenant: Peter Koudijs (Erasmus)

Room: T020

Abstract

Do banks’ reputational concerns improve the quality of opaque, off-balance sheet securities? We study this question in a unique setting with few confounding factors. In the 1760s, Dutch banking partnerships securitized West-Indian plantation-mortgages that were both risky and opaque. High reputation underwriters made better mortgages that, on average, retained at least 17.5 percent more of their value during a subsequent market bust. Effects are attenuated when the managing partner(s) were married into wealth or faced future claims on the partnership. This highlights the importance of the expected fallout [P1] from reputational damage and the value of retaining reputation for the future.