Government Guarantees and Banks' Income Smoothing

39 Pages Posted: 21 Jun 2016 Last revised: 9 Nov 2020

See all articles by Manuela Dantas

Manuela Dantas

California State University, Northridge

Kenneth J. Merkley

Indiana University - Kelley School of Business - Department of Accounting

Felipe Bastos G. Silva

University of Missouri, Columbia

Date Written: November 7, 2020

Abstract

Prior studies find that banks engage in income smoothing to distort financial performance
in ways that have implications for capital allocation and regulation. We examine whether banks' incentives to engage in this behavior are reduced by government guarantees, which mitigate concerns about financial stability during economic downturns. We exploit the increase in implicit guarantees following the Eurozone creation and the removal of explicit guarantees of the Landesbanken as two distinct but complementary settings, showing that increases (decreases) in government guarantees are associated with significant decreases (increases) in banks' income smoothing. Our findings suggest government guarantees significantly affect the quality of information banks disclose to capital markets.

Keywords: government guarantees; income smoothing, information quality; international financial stability

JEL Classification: M41; G21

Suggested Citation

Dantas, Manuela and Merkley, Kenneth J. and Silva, Felipe Bastos G., Government Guarantees and Banks' Income Smoothing (November 7, 2020). Available at SSRN: https://ssrn.com/abstract=2797697 or http://dx.doi.org/10.2139/ssrn.2797697

Manuela Dantas

California State University, Northridge ( email )

Northridge, CA 91330
United States
8186772419 (Phone)
91330-8372 (Fax)

Kenneth J. Merkley

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Felipe Bastos G. Silva (Contact Author)

University of Missouri, Columbia ( email )

331 Cornell Hall
Columbia, MO 65211
United States
5738829905 (Phone)

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