Earnings Management and Banking Performance : A Stochastic-Frontier Analysis on U.S. Bank Mergers

The aim of the paper is to study the relationship between banking performance and earnings management. Our study focuses on 54 U.S. bank mergers and covers the period 1998-2004. We use the efficiency-frontier analysis to measure banking performance, specifically the stochastic-frontier analysis. Banking performances are estimated through the shortfall ratio which reflects the difference between boundary value and market value. The results indicate a strong heterogeneity in the performance of bank mergers. They also show that the shortfall ratio value is a motivation to manage results: earnings management is more important for the less efficient firms.