We study the impact of the recent government bailout, called Trouble Asset Relief Program (TARP), on bank accounting quality. By adopting a difference-in-difference (DID) method, we find a significantly positive impact of TARP on earnings management of recipient banks, compared with their non-recipient peers. Further, we observe that TARP-recipient banks engage more in earnings-decreasing manipulation rather than earnings-increasing manipulation. This behavior is more obvious for those banks that voluntarily request for TARP funds. Also, participant banks change their accounting strategy to manipulate earnings upwards after TARP funds are paid back. Our findings confirm our hypothesis that TARP-recipient banks are motivated to manipulate downwards (or hide some earnings) to obtain further favorable treatment by the program administrators.

We examine the impact of social networks between independent directors and the CEO on firm risk. Employing the deaths and retirements of socially connected independent directors and the passage of the 2002 Sarbanes-Oxley Act for two identifications, we find that board-CEO social networks have a positive impact on firm risk. Specifically, CEOs who are socially connected to their independent directors are motivated to adopt riskier investment, operating and financing strategies. This positive influence is more pronounced for prior under-performing firms and for CEOs with low power or overconfidence, indicating that board-CEO social networks act as career insurance and a power-enhancing mechanism to encourage managerial risk-taking.