Real Earnings Management in the Financial Industry

• In Event: Financial Institutions and Discretionary Behaviour

Abstract

I find evidence of real earnings management by banks that initiate additional loans in the
third month of fiscal quarters when their reported EPS just meets or beats benchmarks.
While most fees are allocated over the life of the loan, lead arrangers can, in certain
cases, recognize a disproportionate fraction of front-end fees in the quarter of issuance.
Although these loans boost reported EPS, they are costly. They are offered at a discount
of 15–20 basis points, and loan quality deteriorates over time as borrowers experience
credit rating downgrades and CDS initiations. I also find two unusual aspects: These
loans are initiated more quickly and involve more syndicate participation from non-bank
lenders.

Author

• Aytekin Ertan, Yale University