The recent financial crisis has lead to heated debates on the pros and cons of fair value accounting from the perspectives of illiquidity and procyclicality. Previous research investigates the relationship between fair value accounting and procyclicality and finds mixed evidence of this relationship during economic recessions. However, few studies examined the relationship between fair value accounting and the financial crisis during economic booms. The purpose of this study is to examine whether fair value accounting promotes procyclicality by focusing on securitization transactions during economic booms. We examine the relationship between securitization accounting and procyclicality by using a parsimonious model. The findings are as follows. When a gain on sale is recognized under certain conditions, sale accounting decreases the leverage ratio compared with that before the securitization transaction. Banks increase assets to maintain the target leverage ratio. Furthermore, if banks conduct securitization transactions and adopt sale accounting, the leverage ratio decreases; therefore, banks increase assets to maintain the leverage ratio. It is expected that both sale accounting and fair value accounting promote procyclicality during economic booms. This study makes two contributions to accounting literature and accounting standard settings. First, it proposes a new perspective on the relationship between fair value accounting and procyclicality. Second, this study suggests that accounting standard setters reconsider the movement of accounting for securitization.
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