Bank intervention and firms’ earnings management: evidence from debt covenant violations

Earnings management has long been one of the main concerns in accounting and management literature, and the extent to which corporate governance mechanisms can discipline management behaviour and prevent earnings management has attracted increasing interest among policy makers and academic researchers. Differing from previous corporate governance literature that focuses mainly on the board and auditors, we explore the role of creditors in corporate governance. In particular, we examine the effect of bank intervention on earnings management via the lens of debt covenant violations, where control rights are transferred to creditors (banks). Using a Difference-in-Difference approach, we find that firms reduce both their accruals-based and real earnings management following debt covenant violations. The negative effect on earnings management is more prominent when banks possess greater bargaining and monitoring power and when firms are more financially constrained. By identifying a specific channel through which debt providers influence corporate financial reporting, our findings suggest that creditors can play an important role in governing organisations and disciplining management behaviour.</p

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

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.</p

Watch out for bailout: TARP and bank earnings management

We study the impact of the recent government bailout, called Trouble Asset Relief Program (TARP), on bank accounting quality. By adopting a difference-in-difference (DID) method, we find a significantly positive impact of TARP on earnings management of recipient banks, compared with their non-recipient peers. Further, we observe that TARP-recipient banks engage more in earnings-decreasing manipulation rather than earnings-increasing manipulation. This behavior is more obvious for those banks that voluntarily request for TARP funds. Also, participant banks change their accounting strategy to manipulate earnings upwards after TARP funds are paid back. Our findings confirm our hypothesis that TARP-recipient banks are motivated to manipulate downwards (or hide some earnings) to obtain further favorable treatment by the program administrators

The recognition results of discontinuous domains at various TS-score and SI cutoffs.

<p>(A) MCC; (B) Recall; (C) Precision (5 parallel lines show the boundaries of the precision region at different b values). (D) The figure of <a href="http://www.plosone.org/article/info:doi/10.1371/journal.pone.0141541#pone.0141541.e009" target="_blank">Eq 6</a>.</p

The comparison of the templates from CATH+SCOP, Pfam and CATH+SCOP+PFAM.

<p>(A) Precision comparison; (B) The proportion of templates coming from CATH+SCOP and Pfam as parameter b varies.</p

The training and validation results using <i>T</i>_<i>SI</i> = <i>f</i>(<i>T</i>_<i>TS</i>,<i>b</i>) constraints.

<p>The cutoff <i>T</i>_<i>TS</i> (for TS-score) and <i>T</i>_<i>SI</i> (for SI) in <a href="http://www.plosone.org/article/info:doi/10.1371/journal.pone.0141541#pone.0141541.g005" target="_blank">Fig 5</a> are constrained by <a href="http://www.plosone.org/article/info:doi/10.1371/journal.pone.0141541#pone.0141541.e009" target="_blank">Eq 6</a>. (A) The results on the Training Dataset with parameter b from 0.9 to 0.1; (B) The results on the Validation Dataset with parameter b from 0.9 to 0.1, respectively.</p

The cases of N- to C-termini assembly.

<p>(A) The 3D structure of PDB: 1axkB. The two segments of the discontinuous domain (1–156|342–393) are colored in magenta and lemon green, respectively. (B) The 3D structure of PDB:1u0aD. It is an AB type Segment-Swapping Domain. (C) The 3D structure of PDB:1cpmA. It is a BA type Segment-Swapping Domain.</p

An illustration of the procedure to generate the samples.

<p>A 3-domain chain is defined as (A1A2)(B)(C). A1 and A2 form one structure domain, while B and C are independent domain, respectively. The (A1A1) is treated as “Positive” sample; (A1C) and (BC) as “Negative” and other combinations are ignored.</p

The Pseudo code of DomEx.

<p>The Pseudo code of DomEx.</p

The benchmark results of DomEx with domain boundary predictors.

<p>The methods with discontinuous domain detection are shown as dark bars.</p