Watch out for bailout: TARP and bank earnings management

Yaoyao Fan, Yichu Huang, Yuxiang Jiang and Frank Hong Liu

Journal of Financial Stability, 2020, vol. 51, issue C

Abstract: We study the impact of the recent government bailout, called Trouble Asset Relief Program (TARP), on bank accounting quality. By adopting a difference-in-difference (DID) method, we find a significantly positive impact of TARP on earnings management of recipient banks, compared with their non-recipient peers. Further, we observe that TARP-recipient banks engage more in earnings-decreasing manipulation rather than earnings-increasing manipulation. This behavior is more obvious for those banks that voluntarily request for TARP funds. Also, participant banks change their accounting strategy to manipulate earnings upwards after TARP funds are paid back. Our findings confirm our hypothesis that TARP-recipient banks are motivated to manipulate downwards (or hide some earnings) to obtain further favorable treatment by the program administrators.

Keywords: Government bailout; TARP; Bank earnings management (search for similar items in EconPapers)
JEL-codes: G21 G28 G30 G34 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:51:y:2020:i:c:s157230892030084x

DOI: 10.1016/j.jfs.2020.100785

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