Bank Monitoring Incentives and Borrower Earnings Management: Evidence from the Japanese Banking Crisis of 1993-2002

Yasushi Hamao, Jun-Koo Kang & Gil S. Bae
We examine banks' disincentives to monitor borrower earnings management activity during the Japanese banking crisis of 1993-2002. We show that during this period, a period characterized by significant deterioration in the financial health of the Japanese banking sector, firms that borrow a large amount of short-term loans from their main bank manage earnings more aggressively around public equity offerings. This result derives largely from the subsample of offerings by poorly performing firms that maintain lending...
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