Bank Monitoring Incentives and Borrower Earnings Management: Evidence from the Japanese Banking Crisis of 1993-2002

55 Pages Posted: 12 Mar 2009

See all articles by Gil S. Bae

Gil S. Bae

Korea University - Department of Accounting

Yasushi Hamao

University of Southern California - Marshall School of Business - Finance and Business Economics Department; Center on Japanese Economy and Business

Jun-Koo Kang

Nanyang Business School, Nanyang Technological University

Date Written: March 11, 2009

Abstract

We examine banks' disincentives to monitor borrower earnings management activity during the Japanese banking crisis of 1993-2002. We show that during this period, a period characterized by significant deterioration in the financial health of the Japanese banking sector, firms that borrow a large amount of short-term loans from their main bank manage earnings more aggressively around public equity offerings. This result derives largely from the subsample of offerings by poorly performing firms that maintain lending relationships with main banks that are in weak financial health. We also find a significant decrease in post-offering short-term lending by the main banks for firms that manage earnings upward prior to the offerings. In contrast, we do not find such results during the boom period of 1983-1992. Our results suggest that, when they are under great pressure for survival, Japanese main banks have few incentives to monitor corporate managers, and act primarily in the interests of short-term creditors.

Keywords: Main banks, Short-term creditors, Monitoring, Lending relationship, Public equity offerings, Earnings management, Discretionary current accruals.

JEL Classification: G21, G34, M41

Suggested Citation

Bae, Gil Soo and Hamao, Yasushi and Hamao, Yasushi and Kang, Jun-Koo, Bank Monitoring Incentives and Borrower Earnings Management: Evidence from the Japanese Banking Crisis of 1993-2002 (March 11, 2009). Available at SSRN: https://ssrn.com/abstract=1357834 or http://dx.doi.org/10.2139/ssrn.1357834

Gil Soo Bae

Korea University - Department of Accounting ( email )

Seoul, 136-701
Korea

Yasushi Hamao

Center on Japanese Economy and Business ( email )

3022 Broadway
New York, NY 10027
United States
310-717-0503 (Phone)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
310-717-0503 (Phone)

Jun-Koo Kang (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Nanyang Avenue, Block S3-01b-54
Singapore, 639798
Singapore
(+65) 6790-5662 (Phone)
(+65) 6791-3697 (Fax)

HOME PAGE: http://www.nbs.ntu.edu.sg/nbs_corporate/divisions/bnf/index.asp

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
132
Abstract Views
1,010
rank
298,467
PlumX Metrics