Real Earnings Management through Syndicated Lending

Abstract

I examine banks' management of earnings through syndicated lending activities. This novel setting allows a transaction-specific, within-quarter analysis of real earnings management. My findings suggest that public lenders that narrowly beat earnings benchmarks, to book origination fees, initiate more loans in the last month of fiscal quarters. I also find that this boost in lending is not costless: These loans are offered at a 3–7 percent discount and under-perform. Overall, I provide model-free evidence of real earnings management and quantify its costs. My findings also show that banks' financial reporting objectives influence corporate loan contracting and the real economy.

Keywords: Real earnings management, banking, lending, corporate finance, cost of debt, benchmark-beating

JEL Classification: G21, G24, G32, M41