Activity Strategies, Information Asymmetry, and Bank Opacity

Abstract

Using a large panel of US bank holding companies from 2001 to 2015, we investigate the association between functional diversification and bank earnings management. We document a positive relationship between bank earnings management and bank diversification. Our findings are consistent with the hypothesis that diversification increases the asymmetric information of banks, leading to greater discretionary power by bank managers. This effect is most prevalent in smaller banks and non-dividend paying banks. The impact of diversification on earnings management is less pronounced during the crisis. Our study is of interest to regulators and other stakeholders who examine factors which affect behavior of bank managers.

Keywords: bank earnings management, opacity, activity strategies, diversification, information asymmetry

JEL Classification: G21, G28, G34, G38