Hands in the cookie jar: Exploiting loan loss provisions under bank financial distress

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We investigate earnings management (EM) behaviour at failed banks by examining the intensity and direction of EM around FDIC-insured commercial bank failures. Our empirical analysis indicates that failing banks engage in EM to a significantly greater extent than non-failing banks. Our results show that failing banks’ discretion over loan loss provisions ranges from aggressive (upwards EM) to conservative (downwards EM).