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Dr Amir Amel-Zadeh

Amir Amel-Zadeh

Title of research: Earnings Management and Bank Capital

This project considers the role of earnings management in generating incentives for financial institutions to carry risk on their balance sheet. The role of mark-to-market accounting and asset sales have been emphasized as a problem for restructuring loan portfolios and recapitalizing banks, but there is less investigation of this channel in creating balance sheet problems in the first place. In particular, we examine how market sentiment affects the valuation of different sources of bank earnings, interest income versus trading gains, over the economic cycle. If mark-to-market generated income attracts a higher market valuation during economic booms,  bank managers will, in the short run, be inclined to cater to market sentiment in their quest to maximize value thus holding more assets on their balance sheet that are susceptible to market movements.  We believe this hypothesis is underemphasized in the crisis and efforts at reform.

Research Update March 2016

Research Update September 2015

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