Government Guarantees and Banks' Income Smoothing
39 Pages Posted: 21 Jun 2016 Last revised: 9 Nov 2020
Date Written: November 7, 2020
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: Suggested Citation