Government Guarantees and Banks' Income Smoothing

Journal of Financial Services Research (forthcoming)

46 Pages Posted: 21 Jun 2016 Last revised: 17 Jan 2023

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: January 15, 2023

Abstract

We propose four channels through which government guarantees affect banks’ incentives to smooth income. Empirically, we exploit two complementary settings that represent plausible exogenous changes in government guarantees: the increase in implicit guarantees following the creation of the Eurozone and the removal of explicit guarantees granted to the Landesbanken. We show that increases (decreases) in government guarantees are associated with significant decreases (increases) in banks' income smoothing. Taken together, our results largely corroborate the predominance of a tail-risk channel, wherein government guarantees reduce banks’ tail risk, thereby reducing managers’ incentives to engage in income smoothing.

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

JEL Classification: G28; G21

Suggested Citation

Dantas, Manuela and Merkley, Kenneth J. and Silva, Felipe Bastos G., Government Guarantees and Banks' Income Smoothing (January 15, 2023). Journal of Financial Services Research (forthcoming), 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)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
4,026
Abstract Views
26,134
Rank
4,845
PlumX Metrics