The Relationship Between Bank Risk and Earnings Management: Evidence from Japan

The Relationship Between Bank Risk and Earnings Management: Evidence from Japan Using stock price data drawn from the 1990s in Japan, this paper empirically shows that bank risk is negatively associated with discretionary accruals, indicating that investors misinterpreted high reported earnings as favorable information about bank financial health. We also show that the negative relationship was very powerful prior to the major bank failures in late 1997 and 1998, but it diminished subsequent to the failures. We conclude that investors started to anticipate potential manipulation of financial reports by bank managers more rationally after the major bank failures. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

The Relationship Between Bank Risk and Earnings Management: Evidence from Japan

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2004 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/B:REQU.0000025762.89848.41
Publisher site
See Article on Publisher Site

Abstract

Using stock price data drawn from the 1990s in Japan, this paper empirically shows that bank risk is negatively associated with discretionary accruals, indicating that investors misinterpreted high reported earnings as favorable information about bank financial health. We also show that the negative relationship was very powerful prior to the major bank failures in late 1997 and 1998, but it diminished subsequent to the failures. We conclude that investors started to anticipate potential manipulation of financial reports by bank managers more rationally after the major bank failures.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 2, 2004

References

  • Earnings-Based and Accrual-Based Market Anomalies: One Effect or Two?
    Collins, D.; Hribar, P.

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