scholarly journals IAS 39, income smoothing, and pro-cyclicality: evidence from Hong Kong banks

2016 ◽  
Vol 8 (1) ◽  
pp. 80-94 ◽  
Author(s):  
Azira Abdul Adzis ◽  
David W.L. Tripe ◽  
Paul Dunmore
Keyword(s):  
Hong Kong ◽  
East Asia ◽  
Financial Reporting ◽  
Income Smoothing ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Ias 39 ◽  
Cyclical Behavior ◽  
East Asia Region

Purpose The purpose of this study is to investigate the impact of International Accounting Standard 39 (IAS 39) on income-smoothing activities and pro-cyclical behavior through loan loss provisions using a sample of Hong Kong banks. Design/methodology/approach Fixed effects estimator is used, and the analysis covers the period from 2000 to 2009. Findings The results suggest that Hong Kong banks engage less in income-smoothing activity after they comply with the IAS 39. No evidence supports loan loss provisions of Hong Kong banks exhibiting more pro-cyclical behavior after IAS 39 adoption. Research limitations/implications Compliance with IAS 39 should improve the quality of bank financial reporting. The reduction in income-smoothing activities among Hong Kong banks after IAS 39 adoption fairly supports the effectiveness of International Financial Reporting Standard (IFRS) and countries that have yet to comply with IFRS may take action to apply the standards. Bank regulators should take pro-active action in addressing the issue of pro-cyclicality of loan loss provisions, as IAS 39 focuses more on improving the financial information quality, while pro-cyclicality is associated with the economic cycles. Originality/value Hong Kong banking industry is unique, as it was among the first IFRS adopters in the East Asia region and it has its own legal framework for developing accounting standards. The results of this study are expected to shed some light on the effects of IAS 39 adoption on income smoothing and pro-cyclicality of banks in the East Asia region, where the accounting cultural value dimensions and institutional structures are different than that of European countries.

scholarly journals Bank earnings smoothing during mandatory IFRS adoption in Nigeria

2019 ◽  
Vol 10 (1) ◽  
pp. 32-47 ◽  
Author(s):  
Peterson K. Ozili ◽  
Erick R. Outa
Keyword(s):  
Financial Reporting ◽  
Income Smoothing ◽  
Accounting Quality ◽  
Loan Loss ◽  
Content Type ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Loan Loss Provisions ◽  
Earnings Smoothing ◽  
Reported Earnings

PurposeThe purpose of this paper is to examine the extent of bank earnings smoothing during mandatory International Financial Reporting Standards (IFRS) adoption in Nigeria, to determine whether mandatory IFRS adoption increased or decreased income smoothing among Nigerian banks.Design/methodology/approachThe authors employ panel regression methodology to estimate the association between loan loss provisions (LLPs) and bank earnings.FindingsThe authorse find that the mandatory adoption of IFRS is associated with lower earnings smoothing among Nigerian banks, which implies that Nigerian banks do not use LLPs to smooth reported earnings during the mandatory IFRS adoption period. The authors find evidence for earnings smoothing via LLP during voluntary IFRS adoption. Earnings smoothing is not significantly associated with listed and non-listed Nigerian banks during voluntary and mandatory IFRS adoption. Overall, the findings indicate that mandatory IFRS adoption improves the informativeness and reliability of LLPs estimate by discouraging Nigerian banks from influencing LLPs for earnings smoothing purposes during the mandatory IFRS adoption. The findings of this paper are relevant to the debate on whether IFRS reporting improves the quality of financial reporting among firms in Nigeria.Practical implicationsOverall, the findings indicate that mandatory IFRS adoption improves the informativeness and reliability of LLPs estimate by discouraging Nigerian banks from influencing LLPs estimates to smooth earnings during the period of mandatory IFRS adoption.Social implicationsThe implication of the study is that IFRS has higher accounting quality than local GAAP in Nigeria as it improves the quality and informativeness of accounting numbers (LLPs and earnings) reported by Nigerian banks during the period examined.Originality/valueThis study is the first attempt to focus on income smoothing during mandatory IFRS adoption in Nigeria.

scholarly journals Impact of IAS 39 reclassification on income smoothing by European banks

2019 ◽  
Vol 17 (3) ◽  
pp. 537-553
Author(s):  
Peterson K. Ozili
Keyword(s):  
Income Smoothing ◽  
International Accounting ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Before And After ◽  
European Banking ◽  
European Banks ◽  
Ias 39 ◽  
The Impact

Purpose The purpose of this study is to examine the impact of the reclassification of International accounting standard (IAS) 39 on income smoothing using loan loss provisions among European banks. Design/methodology/approach Regression methodology is used to determine the extent of income smoothing using loan loss provisions before and after IAS 39 reclassification. The authors predict that the strict recognition and re-classification requirements of IAS 139 reduced banks’ ability to smooth income using bank securities and derivatives, motivating them to rely more on loan loss provisions to smooth income. The authors test this hypothesis over a sample of 114 European banking institutions over the period 2005 to 2013. Findings The findings do not support the prediction for income smoothing through loan loss provisions. Also, there is no evidence for income smoothing in the pre- and post-IAS 39 reclassification period. Research limitations/implications The implication of the findings is that the European banks did not use loan loss provisions to smooth income during the period examined, and rather rely on other accounting numbers to smooth income. This implies that the International Accounting Standards Board’s strict disclosure regulation improved the reliability and informativeness of loan loss provision estimates among European banks during the period of analysis. Originality/value This study is the first attempt to analyze the effect of IAS 39 re-classification on bank’s ability to smooth income in Europe.

scholarly journals The factors affecting the bank’s credit impairment losses by adopting IAS on PSAK 55 in Indonesia

2020 ◽  
Vol 22 (3) ◽  
Author(s):  
Sparta Sparta ◽  
Nadya Trinova
Keyword(s):  
Stock Exchange ◽  
Positive Influence ◽  
Vital Role ◽  
Income Smoothing ◽  
Loan Loss ◽  
Factors Affecting ◽  
Loan Loss Provisions ◽  
Ias 39 ◽  
The Stability

Loan loss provisions in banks plays a vital role in maintaining the stability and health of banks, as well as fulfilling the function of banks in channeling public funds. This study aims to determine the effect of income smoothing and the behavior of procyclicality against reserves of credit losses losses, as well as the role of adoption of IAS 39 in PSAK 55 in moderating the influence of these two variables. The object of this study are conventional commercial banks that are listed on the Indonesia Stock Exchange within the research period of 2008-2017. By using purposive sampling method, I obtained 20 bank samples and 196 observations. The hypotheses in this research are tested using multiple regression analysis. This study shows that income smoothing has a positive influence on loan loss provisions, whereas procyclicality and IAS 39 adoption in PSAK 55 do not affect loan loss provisions significantly. Meanwhile, IAS 39 adoption in PSAK 55 weakens the positive influence of income smoothing, however it cannot moderate the influence of procyclicality on loan loss provisions.  

scholarly journals Discretionary provisioning practices among Western European banks

2017 ◽  
Vol 9 (1) ◽  
pp. 109-118 ◽  
Author(s):  
Peterson K. Ozili
Keyword(s):  
Financial Crisis ◽  
Credit Risk ◽  
Income Smoothing ◽  
Least Square ◽  
Loan Loss ◽  
Content Type ◽  
Crisis Period ◽  
Loan Loss Provisions ◽  
European Banks ◽  
Western European

Purpose The purpose of the study is to investigate whether discretionary ‘loan loss provisioning’ by Western European banks is driven by income smoothing or credit risk considerations. Design/methodology/approach To test the income smoothing hypothesis, the study uses ordinary least square regression to examine the relation between loan loss provisions and earnings before tax and loan loss provisions in the post-financial crisis period. Findings The authors find evidence that discretionary provisioning by Western European banks is driven by income smoothing incentives in the post-financial crisis period, particularly, among listed banks. Also, it is observed that discretionary provisioning is significantly influenced by credit risk factors, mainly, non-performing loans and loan growth. Also, it is found that discretionary provisioning by Western European banks is procyclical with fluctuations in the economic cycle. Overall, the implication of the findings is that discretionary provisioning among Western European banks is driven by both income smoothing and credit risk considerations. Originality/value This study focus on banks in Western Europe in contrast to prior European studies.

Income smoothing behavior and the procyclical effect of loan loss provisions in Islamic banks

2019 ◽  
Vol 10 (1) ◽  
pp. 21-34 ◽  
Author(s):  
Sigid Eko Pramono ◽  
Hilda Rossieta ◽  
Wahyoe Soedarmono
Keyword(s):  
Fixed Effect Model ◽  
Income Smoothing ◽  
Islamic Banks ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Risk Increase ◽  
Effect Model ◽  
Prior Literature ◽  
Loan Growth

Purpose This study aims to test whether loan loss provisions in Islamic banks is procyclical by explicitly examining the link between non-discretionary provisions and loan growth. In the next stage, this paper tests whether the link between non-discretionary provisions and loan growth is conditional on bank capitalization and lending. This is to identify whether bank-specific factors affect the procyclicality of non-discretionary provisions and whether such procyclicality can be explained by income smoothing in banks with different capitalization and loan profiles. Design/methodology/approach This study is conducted in four stages. The first stage identifies the determinants of loan loss provisions. The second stage investigates whether income smoothing is affected by capitalization and lending activities. In the third stage, the link between non-discretionary provisions and loan growth is examined. In the fourth stage, this paper tests whether the link between non-discretionary provisions and loan growth is affected by bank capitalization and lending. A two-way panel-fixed effect model is used. Findings Non-discretionary provisions are procyclical, particularly for banks with lower capitalization and lending activities, because such banks do not conduct income smoothing. Specifically, banks with lower capitalization experience a decline in loan growth when non-discretionary provisions to cover credit risk increase. Research limitations/implications The dataset used in this study follows Soedarmono et al. (2017) and does not enable to differentiate types of financing products in Islamic banks that may exacerbate or mitigate the procyclicality of non-discretionary provisions. Originality/value This paper extends prior literature on the procyclicality of loan loss provisions by specifically investigating the influence of non-discretionary provisions on loan growth in Islamic banks and whether such relationship depends on the role of income smoothing undertaken by banks with different levels of capitalization and lending. This paper builds on the work of Soedarmono et al. (2017) in which they do not explicitly examine the relationship between loan loss provisions and loan growth.

scholarly journals Banking sector earnings management using loan loss provisions in the Fintech era

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Peterson K. Ozili
Keyword(s):  
Earnings Management ◽  
Banking Sector ◽  
Income Smoothing ◽  
Loan Loss ◽  
Content Type ◽  
Eu Countries ◽  
Loan Loss Provisions ◽  
Country Level ◽  
Show Evidence ◽  
Second Wave

PurposeThis paper analyzes banking sector earnings management using loan loss provisions (LLPs) in the Fintech era.Design/methodology/approachRegression methodology was used to examine earnings management in the Fintech era.FindingsThe findings show evidence for bank income smoothing using LLPs. There is greater income smoothing in the second-wave Fintech era compared to the first-wave Fintech era, and the presence of strong institutions did not lower income smoothing in the second-wave era. Bank income smoothing is also greater in (1) Bank of International Settlement (BIS) and EU countries than in non-EU countries and G7 countries, (2) well-capitalized banking sectors and (3) during economic booms in the second-wave Fintech era.Practical implicationsThe competition for loans and deposits by banks and Fintech lenders in the second-wave Fintech era created additional incentives for banks to engage in income smoothing to report competitive and stable earnings.Originality/valueThe study uses a unique approach to detect country-level earnings management in the banking sector. Also, this study extends the bank earnings management literature by introducing the Fintech era as a determinant of the extent of bank earnings management.

scholarly journals Bank loan loss provisioning during election years: cross-country evidence

2019 ◽  
Vol 16 (4) ◽  
pp. 413-431
Author(s):  
Peterson K. Ozili
Keyword(s):  
Banking Sector ◽  
Developed Countries ◽  
Income Smoothing ◽  
Bank Loan ◽  
Loan Loss ◽  
Political Factors ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Provisioning Behavior ◽  
The Eu

Purpose The purpose of this paper is to examine bank loan loss provisioning behavior during election years – focusing on the effect of elections on banking sector loan loss provisioning. Design/methodology/approach Regression analysis was used to analyze the behavior of bank loan loss provisioning in developed countries during election years. Findings The findings reveal that the banking sectors in developed countries have higher loan loss provisions (LLPs) in election years. Also, income smoothing is present in election years which supports the income smoothing hypothesis. Also, banking sectors with high capital levels have higher LLPs. Although, there were no significant differences in bank loan loss provisioning during election years across the four bloc, the EU banking sectors and the banking sectors of BIS member countries generally have higher LLPs while the non-EU banking sectors and the banking sectors of the G7 member countries generally have fewer LLPs. Originality/value The literature has not explored the effect of political factors such as “election-year risk” on the managers’ discretion in banks. This is the first study that explores the effect of political change on managerial discretion in banks.

scholarly journals Bank earnings management using loan loss provisions: comparing the UK, France, South Africa and Egypt

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Peterson K. Ozili
Keyword(s):  
South Africa ◽  
Financial Crisis ◽  
Earnings Management ◽  
Financial Reporting ◽  
Global Financial Crisis ◽  
Income Smoothing ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provision ◽  
The Uk

PurposeThis paper aims to investigate bank earnings management using loan loss provision. The paper examines income smoothing, which is a type of earnings management. It compares the income smoothing behaviour of banks in the UK, France, South Africa and Egypt.Design/methodology/approachThe study uses the panel fixed effect regression methodology to analyse bank income smoothing.FindingsThe findings show that bank income smoothing is present in the UK and Egypt and absent in France and South Africa. Banks in Egypt used LLPs to smooth income before the global financial crisis. Meanwhile, bank income smoothing is pronounced in France during and after the financial crisis but was absent in the pre-crisis period. Also, bank income smoothing is reduced in countries that (1) have strict banking supervision, (2) adopt common law particularly the United Kingdom, and by countries that adopt civil law, particularly France and Egypt. Bank earnings management is greater in countries that (3) adopt a mixed legal system, particularly South Africa, and in countries that adopt International Financial Reporting Standards accounting standards.Research limitations/implicationsThe implication of the findings is that country differences may affect banks' incentive to smooth income using loan loss provision.Originality/valueThe novelty of this paper is that it explicitly analyses specific countries that have different supervisory regimes, different structure and accounting rules.

Regulatory changes and loan loss provisions management by Chinese banks

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Li Chen ◽  
David Emanuel ◽  
Lina Z. Li ◽  
Mu Yang
Keyword(s):  
Income Smoothing ◽  
Basel Iii ◽  
Capital Management ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Regulatory Changes ◽  
Tier 1 ◽  
Chinese Banks ◽  
Tier 1 Capital

PurposeThe authors examine whether Chinese banks use loan loss provisions (LLPs) for capital management, income smoothing and signaling purposes, and assess the effect of the recent regulatory changes following the implementation of Chinese Basel III on such behavior.Design/methodology/approachThe authors use a unique set of hand-collected data on bank capital combined with financial data downloaded from the China Stock Market and Accounting Research (CSMAR) database. Multivariate regression models are used to test our hypotheses.FindingsThe authors find that while there is no evidence to suggest capital management practice before the Chinese Basel III, the implementation of the new regulations induced listed banks to manage tier-1 capital via LLPs. The authors also find strong support that Chinese banks engage in income smoothing via LLPs management, and there is no change in such tendency following the issuance of Chinese Basel III. Lastly, the authors do not find support for the signaling behavior by Chinese banks using LLPs.Practical implicationsThe authors’ evidence suggests that elevated tier-1 capital and provisioning requirements may induce capital management by banks, which indicates a potential unintended effect brought forth by the new Basel regulations.Originality/valueTo the best of authors’ knowledge, this study is the first to examine Chinese banks' behavior relating to LLPs in terms of capital management, income smoothing and signaling. In particular, the authors use a sample containing a large number of Chinese commercial banks – previously a major data issue in other studies.

Does the business model influence income smoothing? Evidence from European banks

2019 ◽  
Vol 20 (3) ◽  
pp. 311-330
Author(s):  
Costanza Di Fabio
Keyword(s):  
Business Model ◽  
Balance Sheet ◽  
Income Smoothing ◽  
Loan Loss ◽  
Content Type ◽  
Loan Loss Provisions ◽  
Country Level ◽  
European Banks ◽  
External Governance

Purpose The purpose of this paper is to explore whether the business model (BM) influences bank income smoothing by considering two competing perspectives, the opportunistic and the information enhancement one. Additionally, the paper addresses the role of auditors’ involvement in national supervision and external governance. Design/methodology/approach Income smoothing is measured by regressing loan loss provisions on unmanaged earnings, and the moderating role of country-level factors is tested employing three-way interactions. The sample consists of European banks observed from 2004 to 2015. Findings Results indicate that the BM affects smoothing and that retail-funded banks exhibit smoother earnings due to informative reasons. National supervisors’ emphasis on audit is positively associated with smoothing by market-oriented banks, whereas external governance constrains smoothing in diversified-retail banks. Research limitations/implications European reforms strengthening monitoring bodies could bring the unintended effect of inducing opportunistic behaviours in market-oriented BMs. However, this study employs indirect proxies for institutional factors and does not consider internal-governance issues. Practical implications Evidence sustains the IASB choice of the expected-loss approach for estimating credit losses as it could enhance the informativeness of retail-funded banks’ accounting numbers. Originality/value This paper contributes to the income smoothing literature by addressing the role of the BM as a whole in explaining smoothing propensity, not limiting the observation to partial features of the balance sheet. Moreover, it supports a counterintuitive argument, the penalty hypothesis, assuming that stronger supervision increases bank incentives to manage earnings to avoid penalties.

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