Financial Performance of Main Banks and Earnings Management of Borrowing Firms

[Purpose]In this study, we examine the effect of the financial performance of main banks on earnings management of borrowing firms. [Methodology]The BIS capital ratio, the return on equity ratio, and the non－performing loans of main banks are used to measure main banks’ financial performance. The modified Jones discretionary accruals is used to measure the earnings management of borrowing firms. [Findings]Results of this study indicate that the association between discretionary accruals of borrowing firms and the BIS capital ratio of main banks is significantly positive. In addition, the association between discretionary accruals of borrowing firms and the non－performing loans of main banks is significantly negative. Overall, our results support relationship banking and the financial performance of main banks plays a significant role in the earnings management of borrowing firms. [Implications]We find that financial performance of main banks is an important determinant for the earnings management of borrowing firms.