Government Guarantees and Banks' Income Smoothing

57 Pages Posted: 21 Jun 2016 Last revised: 27 Feb 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: December 27, 2019

Abstract

Prior studies find that banks engage in earnings management behavior to distort reported 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. Using two distinct but complementary settings that represent changes in government guarantees, we find that decreases in government guarantees are associated with significant increases in banks' earnings management behavior, whereas increases result in the opposite behavior. Our findings suggest government guarantees play a significant role in bank managers' reporting behavior, affecting 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 (December 27, 2019). 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)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
3,691
Abstract Views
18,538
rank
2,885
PlumX Metrics