Finance/AccountingThis paper examines how client firms’ financial performances influence their main banks. Specifically, this paper examines how client firms' net income, return on assets, and return on equity affect main banks' financial performances and earnings managements.
There are several reasons why financial performances of client firms are more likely to influence their main banks. First, revenues of main banks heavily rely on interest revenues from client firms. If the client firms’ financial performances get worse, banks are more likely to suffer from increasing credit risks. Second, banks are known to have superior monitoring over client firms (Diamond, 1984). If client firms would not perform well, thier main banks are more likely to detect client firms' financial performances. Therefore, managers of main banks are more likely to take actions to maintain a certain level of capital ratio when financial performances of client firms do not well.
Results of this study indicate that the client firms influence their main banks. Specifically, I find a positive and significant relationship between client firms’ financial performance and their main banks' financial performance. In addition, I find a negative and significant relationship between client firms' financial performance and their main banks' earnings management.
This paper contributes to banks and earnings management literature by examining how client firms’ financial performances significantly influence their main banks. Most of prior literatures have documented that how main banks can significantly influence their client firms (Kang and Stulz, 2000; Baik and Choi, 2010). However, this paper provides evidence that how client firms influences to their main banks.ope
