Earnings Management and Investor Protection During a Banking Crisis: The Role of the “Spare Tire” Effect

Abstract

This article analyzes the association between earnings management and investor protection during banking crises. Using a sample of firms from 16 European countries for the period 2006–2018, we show that, as banking conditions worsen, firms are more likely to manage earnings upward in countries with a stronger institutional environment, where alternative sources of financing are better available and more accessible. Moreover, we show that this strategy is successful because these firms are able to raise relatively more equity financing. JEL Classification: M41, G14