Real earnings management through syndicated lending

Ertan, A (2021) Real earnings management through syndicated lending. Review of Accounting Studies. ISSN 1380-6653 (Accepted)

Abstract

I examine whether banks manage syndicated loan originations to achieve financial reporting goals. Using a large sample of loans and relying on a within-quarter analysis, I find that publicly traded banks that narrowly beat earnings benchmarks initiate more loans in the last month of the fiscal quarter to book origination fees. Relative to otherwise similar loans, these loans are associated with front-end fees that are 4.2% higher but have credit spreads that are 3.3% lower, resulting in a net price discount of 2.5%. The findings are stronger for bigger banks, for lenders that are funding-constrained, and for banks whose managers’ pay is more sensitive to stock performance. Further, these loans underperform in terms of future defaults and rating downgrades. Finally, I find that while the hypothesized earnings management helps banks raise capital in the short term, it is costly in the longer term, as it is associated with lower capital and profitability ratios. Overall, I provide model-free evidence on banks’ real earnings management and the costs of this behavior.

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Item Type: Article
Subject Areas: Accounting
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© 2021 Springer. This is a post-peer-review, pre-copyedit version of an article published in Review of Accounting Studies. The final authenticated version will be available online at [awaiting DOI]

Date Deposited: 25 Jan 2021 10:57
Date of first compliant deposit: 20 Jan 2021
Subjects: F > Financial reporting
D > Debts
Last Modified: 04 Feb 2021 08:48
URI: https://lbsresearch.london.edu/id/eprint/1652
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