Government Guarantees and Banks' Income Smoothing
57 Pages Posted: 21 Jun 2016 Last revised: 27 Feb 2020
Date Written: December 27, 2019
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: Suggested Citation