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Bank Earnings Management and Tail Risk during the Financial Crisis
Author(s) -
COHEN LEE J.,
CORNETT MARCIA MILLON,
MARCUS ALAN J.,
TEHRANIAN HASSAN
Publication year - 2014
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12101
Subject(s) - financial crisis , downside risk , stock (firearms) , earnings , earnings management , financial system , business , stock market , stock price , economics , monetary economics , finance , portfolio , mechanical engineering , paleontology , horse , series (stratigraphy) , biology , engineering , macroeconomics
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.