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Credit market development and corporate earnings management: Evidence from banking and branching deregulations

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  • Huang, Yichu
  • Liu, Frank Hong
  • Qiu, Buhui

Abstract

We investigate how external credit market development affects corporate earnings management, by studying the impact of the U.S. interstate banking and branching deregulations on the intensity of accruals-based and real earnings management. We find that the banking and branching deregulations significantly decrease both accruals-based and real earnings-management intensity among firms in deregulated states. The effect is stronger for those deregulated states that have lower bank branch density before deregulation and states that have greater out-of-state bank entry after deregulation. The impact on corporate earnings management is channelled through increased banking competition and credit supply providing firms with easier access to external financing. The findings are robust to various endogeneity concerns. We further document that interstate banking and branching deregulations reduce the instances of financial results being subsequently affected by accounting restatements and improve firms’ information environment.

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  • Huang, Yichu & Liu, Frank Hong & Qiu, Buhui, 2023. "Credit market development and corporate earnings management: Evidence from banking and branching deregulations," Journal of Financial Stability, Elsevier, vol. 67(C).
    • Handle: RePEc:eee:finsta:v:67:y:2023:i:c:s1572308923000426
    DOI: 10.1016/j.jfs.2023.101142
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    Cited by:

    1. Yichu Huang & Lei Chen & Frank Hong Liu, 2024. "Bank intervention and firms’ earnings management: evidence from debt covenant violations," Review of Quantitative Finance and Accounting, Springer, vol. 63(1), pages 237-264, July.

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