Did U.S. Banks Manage Their Earnings In The Aftermath Of The 2007-2009 Financial Crisis? Evidence From The Post-Crisis Housing Market

Building on and extending our prior work, this paper studies earnings management practices of banks in the aftermath of the Financial Crisis of 2007-2009. We focus our attention on two distinct groups of institutions; banks headquartered in states that were most impacted by the housing market crisis and those in least impacted states. Our dataset is generated using the Reports of Condition and Income and covers the periods before and after the 2007-2009 Financial Crisis. We divide our balanced panel dataset into two equal subsets and analyze pre- and post-crisis periods separately. Each subset covers a four-year period and consists of 7,560 observations gathered from the same 1,890 banking institutions that had been continuously active from 2003 to 2010. Our empirical evidence lends support to the earnings management hypothesis, suggesting that banks (both low- and high-profit ones) headquartered in states where the housing market crash was most pronounced used loan loss provisions to manage reported earnings in the post-crisis period.