The authors are grateful to Jim Booth, Ozgur Demirtas, Atul Gupta, Jim Musumeci, Jun Qian, Sugata Roychowdhury, Ronnie Sadka, Phil Strahan, and seminar participants at Boston College for their helpful suggestions.
Bank Earnings Management and Tail Risk during the Financial Crisis
Version of Record online: 20 JAN 2014
© 2014 The Ohio State University
Journal of Money, Credit and Banking
Volume 46, Issue 1, pages 171–197, February 2014
How to Cite
COHEN, L. J., CORNETT, M. M., MARCUS, A. J. and TEHRANIAN, H. (2014), Bank Earnings Management and Tail Risk during the Financial Crisis. Journal of Money, Credit and Banking, 46: 171–197. doi: 10.1111/jmcb.12101
- Issue online: 20 JAN 2014
- Version of Record online: 20 JAN 2014
- Manuscript Accepted: 6 NOV 2012
- Manuscript Received: 25 JAN 2012
- financial institutions;
- earnings management;
- 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 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.