Abstract
ABSTRACT This study investigates the relation between liquidity risk exposure and earnings management in banks. We use a dynamic panel-data one-step system generalized method of moments estimation and measure exposure to liquidity risk from balance sheet positions. We detect earnings management through income-increasing and -decreasing strategies. We find that the higher the exposure to liquidity risk due to higher liquidity creation, the greater is upward earnings management. Our findings suggest that banks use earnings management to opportunistically conceal high liquidity risk exposure. These findings should be useful for investors and users of financial statements interested in analyzing earnings quality and financial statement reliability. Data Availability: Data are available from specific sources cited in the text. JEL Classification: G21; G30; G32; M41.
Published Version
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