Bank Earnings Management and Tail Risk during the Financial Crisis

We show that a pattern of earnings management in bank financial statements has little bearing on downside risk during quiet periods, but seems to have a big impact during a financial crisis. Banks demonstrating more aggressive earnings management prior to 2007 exhibit substantially higher stock mark...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 2014-02, Vol.46 (1), p.171-197
Main Authors: COHEN, LEE J., CORNETT, MARCIA MILLON, MARCUS, ALAN J., TEHRANIAN, HASSAN
Format: Article
Language:English
Subjects:
Bank assets
Bank earnings
Bank management
Bank regulation
Banking crises
Banking industry
Comparative analysis
crashes
Creative accounting
Earnings
earnings management
Economic crises
Financial crisis
financial institutions
Financial risks
G01
G11
G21
G28
Loan losses
M40
Standard deviation
Stock exchange
Stock prices
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Summary:We show that a pattern of earnings management in bank financial statements has little bearing on downside risk during quiet periods, but seems to have a big impact during a financial crisis. Banks demonstrating more aggressive earnings management prior to 2007 exhibit substantially higher stock market risk once the financial crisis begins as measured by the incidence of large weekly stock price "crashes" as well as by the pattern of full-year returns. Stock price crashes also predict future deterioration in operating performance. Bank regulators may therefore interpret them as early warning signs of impending problems.
ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.12101