Policy uncertainty and loan loss provisions in the banking industry

Purpose This study aims to examine the effect of equity incentives on earnings management that occurs via the use of loan loss provisions by using a sample of 204 bank-year observations over the period 2006-2011. Design/methodology/approach The authors use the data of 39 European banks to test the main hypothesis. Several valuation models and regressions are used to measure the main proxies for executives’ compensation and the determinant factors of loan loss provisions. Findings The empirical results reveal that earnings management that occurs via discretionary loan loss provisions is associated with equity incentives in the banking industry. In particular, European banks’ executives with high equity incentives are found to manage reported earnings upwards by reducing loan loss provisions. The results therefore show that income-increasing earnings management via discretionary loan loss provisions is widely practised by the executives of European banks and that this is partly motivated by executives’ compensation. Practical implications The findings of this paper present important implications for regulators in the European Union, who should take further steps to reform the regulatory environment to monitor and mitigate the earnings management practices that occur via the manipulation of loan loss provisions. Earnings management practices do not just negatively affect subsequent performance but are also found to lead to firms’ failure. Thus, regulators should take the necessary reforms to protect the wealth of stakeholders (investors, creditors, etc.). Originality/value This study provides the first evidence on the relationship between equity incentives and earnings management in the European banking industry. The study sheds more light on an issue of great interest to a broad audience that does not receive much attention in the prior research, thus opening new avenues for future research.

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Loan Loss Provisions and Earnings Management in Malaysian Banking Industry

GATR Global Journal of Business Social Sciences Review - GATR Global Journal of Business and Social Science Review (GJBSSR) Vol.7(1) Jan-Mar 2019 ◽

10.35609/gjbssr.2013.1.1(10) ◽

2013 ◽

Vol 1 (1) ◽

pp. 93-104

Author(s):

Hasni Abdullah ◽

Imbarine Bujang ◽

Ismail Ahmad

Keyword(s):

Earnings Management ◽

Commercial Banks ◽

Global Financial Crisis ◽

Banking Industry ◽

Least Square ◽

Capital Management ◽

Loan Loss ◽

Macroeconomic Factors ◽

Ordinary Least Square ◽

Loan Loss Provisions

Objective The main purpose of the study is to investigate the presence of earnings management incentive in affecting the LLP decision of commercial banks in Malaysia, focusing on the relation between loan loss provisions and earnings before tax and provisions. Methodology/Technique This study applies the pooled Ordinary Least Square model in assessing the determinants of the LLP. Findings The empirical findings clearly indicate that the LLP in Malaysian commercial banks is affected by earnings management for that particular period Type of Paper: Empirical paper Novelty : The expansion of the existing research in Malaysia in order to examine the extent to which the Malaysian banks engage in earnings and capital management, extends the period of investigation by considering the recent global financial crisis 2007-2009. Keywords: Loan Loss Provisions; Earnings Management; Capital Management; Macroeconomic Factors; Commercial Banks.

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Does banking oversight make financial statements more reliable? An analysis through countries which are part of the Single Supervisory Mechanism (SSM)

Corporate Ownership and Control ◽

10.22495/cocv16i3art4 ◽

2019 ◽

Vol 16 (3) ◽

pp. 36-51

Author(s):

Giacomo Ceccobelli ◽

Alessandro Giosi

Keyword(s):

Earnings Management ◽

Banking Industry ◽

Financial Statements ◽

Income Smoothing ◽

Capital Management ◽

Loan Loss ◽

Single Supervisory Mechanism ◽

Loan Loss Provisions ◽

Regulation And Supervision ◽

Bank Regulation And Supervision

The purpose of this research is to investigate earnings management purposes in the banking industry via loan loss provisions using a sample of 156 banks from 19 European countries under the Single Supervisory Mechanism (SSM) over the period 2006-2016. Using regression analysis, banks are tested for income smoothing, capital management, and signaling purposes. This study contributes to the literature exploring the relationship between accounting quality and earnings management objectives by analyzing which one of the latter is the more important determinant. The hypotheses of income smoothing and signaling are strongly approved since loan loss provisions consist as a tool for smoothing the amount of net profit and to convey private information to the market; on the contrary, the capital management purpose is not supported. Additionally, the analysis finds that non-discretionary components of loan loss provisions (essentially non-performing loans) have played an important role, especially during the financial crisis. Furthermore, the research is aimed at investigating the peculiar regulatory and supervisory environment in the banking industry on the basis of a set of indexes included in the “Bank Regulation and Supervision Survey”, carried out by the World Bank. Unlike previous literature, this study takes into account the latest release of the survey, emphasizes the role of an on-site inspection as the main supervisory tool and extends the analysis of the interaction between bank regulation and supervision and earnings management. The results demonstrate that such controls can influence the behaviour of bank managers in terms of income smoothing and signaling practices. Therefore they can be considered as effective instruments for reducing banks’ management accounting discretion, making financial statements more reliable.

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Discretionary Loan Loss Provisions and Systemic Risk in the Banking Industry

Accounting Perspectives ◽

10.1111/1911-3838.12091 ◽

2016 ◽

Vol 15 (2) ◽

pp. 89-130 ◽

Cited By ~ 3

Author(s):

Mary L. Z. Ma ◽

Victor Song

Keyword(s):

Systemic Risk ◽

Banking Industry ◽

Loan Loss ◽

Loan Loss Provisions

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An Empirical Analysis of Auditor Independence in the Banking Industry

The Accounting Review ◽

10.2308/accr.2010.85.6.2011 ◽

2010 ◽

Vol 85 (6) ◽

pp. 2011-2046 ◽

Cited By ~ 125

Author(s):

Kiridaran Kanagaretnam ◽

Gopal V. Krishnan ◽

Gerald J. Lobo

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Internal Control ◽

Deposit Insurance ◽

Banking Industry ◽

Auditor Independence ◽

Loan Loss ◽

Potential Threat ◽

Loan Loss Provisions ◽

Small Banks

ABSTRACT: We examine auditor independence in the banking industry by analyzing the relation between fees paid to auditors and the extent of earnings management through loan loss provisions (LLP). We also examine whether this relation differs across large banks whose managements are required under the Federal Deposit Insurance Corporation Improvement Act to evaluate internal control over financial reporting and whose auditors must attest to the effectiveness of such internal controls, and small banks that are not subject to those requirements. We find that unexpected auditor fees are unrelated to earnings management for large banks. For small banks, we find greater earnings management via under-provisioning of LLP by banks that pay higher unexpected total and nonaudit fees to the auditor. These results suggest that auditor fee dependence on the audit client is associated with earnings management via abnormal LLP and is a potential threat to auditor independence for small banks. Our findings are relevant to policymakers contemplating new regulations in light of the recent banking crisis.

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