Government Guarantees and Banks' Income Smoothing
Journal of Financial Services Research (forthcoming)
46 Pages Posted: 21 Jun 2016 Last revised: 17 Jan 2023
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: Suggested Citation