The (Earnings) Management of Deposit Growth
59 Pages Posted: 20 Oct 2022
Date Written: October 17, 2022
Abstract
Previous work has analyzed the disciplinary role of equity and debt markets on banks and how banks use of accounting discretion to try to reduce this discipline. In this study, we put together data for all U.S. private banks to show that deposit growth is an additional motivation for banks to use accounting discretion. Our results also show that the exercising of accounting discretion is effective; in normal times, banks using more discretion obtain 1%-2% higher ex-post quarterly deposit growth rates than banks using less discretion. This difference reaches 2%-5% in periods with high levels of local instability. These figures are economically significant when compared to the 3% sample-wide average quarterly deposit growth rate. Our findings imply that accounting discretion can help control depositor reactions, but may also reduce the effectiveness of automatic market stabilizers in the financial system.
Keywords: earnings management, deposit growth, private banks.
JEL Classification: M43, G21.
Suggested Citation: Suggested Citation