PRUDENTIAL REGULATORY REGIMES, ACCOUNTING STANDARDS, AND EARNINGS MANAGEMENT IN THE BANKING INDUSTRY
Keywords:
Accounting standard, Banks, Loan loss provision
Abstract
We analyze if a change in accounting standard or a change in prudential regulation
impacts banks’ loan loss provision. We find that, in general, the banks using a
principles-based accounting standard exhibit a lower level of earnings management
compared to banks using a rules-based accounting standard. When a country moves
from pro-cyclical macro-prudential regulations to a dynamic provisioning regime,
banks are more likely to set aside a larger amount of loan loss provision for the purpose
of income smoothing.
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References
Ahmed, A.S., Takeda, C. and Thomas, S. (1999). Bank Loan Loss Provisions: A
Reexamination of Capital Management, Earnings Management and Signaling
Effects. Journal of Accounting Economics, 28, 1-25.
Anandarajan, A., Hasan, I. and Lozano-Vivas, A. (2003). The Role of Loan Loss
Provisions in Earnings Management, Capital Management, and Signaling: The
Spanish Experience. Advances in International Accounting, 16, 45-65.
Balla, E. and McKenna, A. (2009). Dynamic Provisioning: A Countercyclical Tool
for Loan Loss Reserves. Economic Quarterly, 95, 383-418.
Bartov, E., Goldberg, S.R., and Kim, M. (2005). Comparative Value Relevance
Among German, US, and International Accounting Standards: A German
Stock Market Perspective. Journal of Accounting, Auditing & Finance, 20, 95-119.
Beaver, W.H., and Engle, E.E. (1996). Discretionary Behavior with Respect to
Allowance for Loan Losses and the Behavior of Securities Prices. Journal of
Accounting and Economics, 22, 177-206.
Beest, F.V. (2009). Rules-Based and Principles-Based Accounting Standards
and Earnings Management. Nijmegen Center for Economics (NiCE)
Working Paper 09-114, available at: https://repository.ubn.ru.nl//bitstream/
handle/2066/74890/74890.pdf
Bikker, J.A. and Metzemakers, P.A.J. (2005). Bank Provisioning Behavior and
Procyclicality. Journal of International Financial Markets, Institutions and Money,
15, 141-157.
Bouvatier, V. and Lepetit, L. (2008). Banks’ Pro-Cyclical Behavior: Does
Provisioning Matter? Journal of International Financial Markets, Institutions and
Money, 18, 513-526.
Bouvatier, V. and Lepetit, L. (2012). Effects of Loan Loss Provisions on Growth in
Bank Lending: Some International Comparisons. International Economics, 132,
91-116.
Bouvatier, V., Lepetit, L., and Strobel, F. (2014). Bank Income Smoothing,
Ownership Concentration and the Regulatory Environment. Journal of Banking
and Finance, 41, 253-270.
Burroni, M., Quagliariello, M., Sabatini, E. and Tola, V. (2009). Dynamic Provisioning:
Rationale, Functioning, and Prudential Treatment. Bank of Italy Research Paper
Series No.57, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_
id=1697575
Capkun, V., Jeny, A.C., Jeanjean, T. and Weiss, L.A. (2010). Setting the Bar: Earnings
Management During a Change in Accounting Standards. Financial Reporting
ESSEC-KPMG Centre Working Paper, available at: https://hal.archivesouvertes.
fr/hal-00675060/0
Carbó-Valverde, S. and Rodríguez-Fernández, F. (2010). Counter-Cyclical
Provisions, Managerial Discretion and Loan Growth: The Case of Spain.
Working Paper, available at : http://citeseerx.ist.psu.edu/viewdoc/
download?doi=10.1.1.644.5534&rep=rep1&type=pdf
Chan-Lau, J. A. (2012). Do Dynamic Provisions Enhance Bank Solvency and
Reduce Credit Procyclicality? A Study of the Chilean Banking System. Journal
of Banking Regulation, 13, 178-188.
Cohen, D.A., Dey, A., and Lys, T.Z. (2008). Real and Accrual-Based Earnings
Management in the Pre- and Post-Sarbanes-Oxley Periods. The Accounting
Review, 83, 757-787.
Das, A., and Ghosh, S. (2007). Determinants of Credit Risk in Indian State-Owned
Banks: An Empirical Investigation. Economic Issues, 12, 27-46.
Djankov, S., McLiesh, C. and Shleifer, A. (2007). Private Credit in 129 Countries.
Journal of Financial Economics, 84, 299-329.
Fan, J. and Wong, T. (2002). Corporate Ownership Structure and the Informativeness
of Accounting Earnings in East Asia. Journal of Accounting and Economics, 33,
401-425.
Fonseca, A.R. and González, F. (2008). Cross-Country Determinants of Bank
Income Smoothing by Managing Loan-Loss Provisions. Journal of Banking and
Finance, 32, 217- 228.
Gebhardt, G. and Novotny-Farkas, Z. (2011). Mandatory IFRS Adoption and
Accounting Quality of European Banks. Journal of Business and Finance
Accounting, 38, 289-333.
Hasan, I. and Wall, L. (2004). Determinants of the Loan Loss Allowance: Some
Cross-Country Comparisons. Financial Review, 39, 129-152.
Hausman, J. (1978). Specification Tests in Econometrics. Econometrica, 46, 1251-
1271.
Hung, M. and Subramanyam, K.R. (2007). Financial Statement Effects of Adopting
International Accounting Standards: The Case of Germany. Review of
Accounting Studies, 12, 623-657.
Laeven, L. and Majnoni, G. (2003). Loan Loss Provisioning and Economic
Slowdowns: Too Much, Too Late? Journal of Financial Intermediation, 12, 178-
197.
La Porta, R, Lopez-de-Silanes, F., and Shleifer, A. (2008). The Economic
Consequences of Legal Origins. Journal of Economic Literature, 46, 285-332.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. (1997). Legal
Determinants of External Finance. Journal of Finance, 52, 1131-1150.
Panetta, F., Angelini, P., Albertazzi, U., Columba, F., Cornacchia, W., DiCesare,
A., Pilati, A. Salleo, C., and Santini, G. (2009). Financial Sector Pro-Cyclicality:Lessons from The Crisis. Banca d’Italia Occasional Papers No. 44, available at:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1479499.
Pérez, D., Salas-Fumás, V. and Saurina, J. (2011). Do Dynamic Provisions Reduce
Income Smoothing Using Loan Loss Provisions? Bank of Spain Working Paper
1118, available at: https://www.bde.es/f/webbde/SES/Secciones/Publicaciones/
PublicacionesSeriadas/DocumentosTrabajo/11/Fich/dt1118e.pdf
Psaros, J. and Trotman, K.T. (2004). The Impact of the Type of Accounting Standards
on Preparers’ Judgments. Abacus, 40, 76-93.
Wahlen, J. (1994). The Nature of Information in Commercial Bank Loans Loss
Disclosures. The Accounting Review, 69, 455-478.
Wezel, T. (2010). Dynamic Loan Loss Provisions in Uruguay: Properties, Shock
Absorption Capacity and Simulations Using Alternative Formulas. International
Monetary Fund Working Paper No. 10/125.
Zhou, H., Xiong, Y. and Ganguli, G. (2010). Accounting Standards and Earnings
Management: Evidence from an Emerging Market. University of Texas Working
Paper, available at: https://www.researchgate.net/profile/haiyan_zhou4/
publication/241420854_accounting_standards_and_earnings_management_
evidence_from_an_emerging_market/links/02e7e52e3ec0b0932b000000/
accounting-standards-and-earnings-management-evidence-from-an-emergingmarket.
pdf.
Reexamination of Capital Management, Earnings Management and Signaling
Effects. Journal of Accounting Economics, 28, 1-25.
Anandarajan, A., Hasan, I. and Lozano-Vivas, A. (2003). The Role of Loan Loss
Provisions in Earnings Management, Capital Management, and Signaling: The
Spanish Experience. Advances in International Accounting, 16, 45-65.
Balla, E. and McKenna, A. (2009). Dynamic Provisioning: A Countercyclical Tool
for Loan Loss Reserves. Economic Quarterly, 95, 383-418.
Bartov, E., Goldberg, S.R., and Kim, M. (2005). Comparative Value Relevance
Among German, US, and International Accounting Standards: A German
Stock Market Perspective. Journal of Accounting, Auditing & Finance, 20, 95-119.
Beaver, W.H., and Engle, E.E. (1996). Discretionary Behavior with Respect to
Allowance for Loan Losses and the Behavior of Securities Prices. Journal of
Accounting and Economics, 22, 177-206.
Beest, F.V. (2009). Rules-Based and Principles-Based Accounting Standards
and Earnings Management. Nijmegen Center for Economics (NiCE)
Working Paper 09-114, available at: https://repository.ubn.ru.nl//bitstream/
handle/2066/74890/74890.pdf
Bikker, J.A. and Metzemakers, P.A.J. (2005). Bank Provisioning Behavior and
Procyclicality. Journal of International Financial Markets, Institutions and Money,
15, 141-157.
Bouvatier, V. and Lepetit, L. (2008). Banks’ Pro-Cyclical Behavior: Does
Provisioning Matter? Journal of International Financial Markets, Institutions and
Money, 18, 513-526.
Bouvatier, V. and Lepetit, L. (2012). Effects of Loan Loss Provisions on Growth in
Bank Lending: Some International Comparisons. International Economics, 132,
91-116.
Bouvatier, V., Lepetit, L., and Strobel, F. (2014). Bank Income Smoothing,
Ownership Concentration and the Regulatory Environment. Journal of Banking
and Finance, 41, 253-270.
Burroni, M., Quagliariello, M., Sabatini, E. and Tola, V. (2009). Dynamic Provisioning:
Rationale, Functioning, and Prudential Treatment. Bank of Italy Research Paper
Series No.57, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_
id=1697575
Capkun, V., Jeny, A.C., Jeanjean, T. and Weiss, L.A. (2010). Setting the Bar: Earnings
Management During a Change in Accounting Standards. Financial Reporting
ESSEC-KPMG Centre Working Paper, available at: https://hal.archivesouvertes.
fr/hal-00675060/0
Carbó-Valverde, S. and Rodríguez-Fernández, F. (2010). Counter-Cyclical
Provisions, Managerial Discretion and Loan Growth: The Case of Spain.
Working Paper, available at : http://citeseerx.ist.psu.edu/viewdoc/
download?doi=10.1.1.644.5534&rep=rep1&type=pdf
Chan-Lau, J. A. (2012). Do Dynamic Provisions Enhance Bank Solvency and
Reduce Credit Procyclicality? A Study of the Chilean Banking System. Journal
of Banking Regulation, 13, 178-188.
Cohen, D.A., Dey, A., and Lys, T.Z. (2008). Real and Accrual-Based Earnings
Management in the Pre- and Post-Sarbanes-Oxley Periods. The Accounting
Review, 83, 757-787.
Das, A., and Ghosh, S. (2007). Determinants of Credit Risk in Indian State-Owned
Banks: An Empirical Investigation. Economic Issues, 12, 27-46.
Djankov, S., McLiesh, C. and Shleifer, A. (2007). Private Credit in 129 Countries.
Journal of Financial Economics, 84, 299-329.
Fan, J. and Wong, T. (2002). Corporate Ownership Structure and the Informativeness
of Accounting Earnings in East Asia. Journal of Accounting and Economics, 33,
401-425.
Fonseca, A.R. and González, F. (2008). Cross-Country Determinants of Bank
Income Smoothing by Managing Loan-Loss Provisions. Journal of Banking and
Finance, 32, 217- 228.
Gebhardt, G. and Novotny-Farkas, Z. (2011). Mandatory IFRS Adoption and
Accounting Quality of European Banks. Journal of Business and Finance
Accounting, 38, 289-333.
Hasan, I. and Wall, L. (2004). Determinants of the Loan Loss Allowance: Some
Cross-Country Comparisons. Financial Review, 39, 129-152.
Hausman, J. (1978). Specification Tests in Econometrics. Econometrica, 46, 1251-
1271.
Hung, M. and Subramanyam, K.R. (2007). Financial Statement Effects of Adopting
International Accounting Standards: The Case of Germany. Review of
Accounting Studies, 12, 623-657.
Laeven, L. and Majnoni, G. (2003). Loan Loss Provisioning and Economic
Slowdowns: Too Much, Too Late? Journal of Financial Intermediation, 12, 178-
197.
La Porta, R, Lopez-de-Silanes, F., and Shleifer, A. (2008). The Economic
Consequences of Legal Origins. Journal of Economic Literature, 46, 285-332.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. (1997). Legal
Determinants of External Finance. Journal of Finance, 52, 1131-1150.
Panetta, F., Angelini, P., Albertazzi, U., Columba, F., Cornacchia, W., DiCesare,
A., Pilati, A. Salleo, C., and Santini, G. (2009). Financial Sector Pro-Cyclicality:Lessons from The Crisis. Banca d’Italia Occasional Papers No. 44, available at:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1479499.
Pérez, D., Salas-Fumás, V. and Saurina, J. (2011). Do Dynamic Provisions Reduce
Income Smoothing Using Loan Loss Provisions? Bank of Spain Working Paper
1118, available at: https://www.bde.es/f/webbde/SES/Secciones/Publicaciones/
PublicacionesSeriadas/DocumentosTrabajo/11/Fich/dt1118e.pdf
Psaros, J. and Trotman, K.T. (2004). The Impact of the Type of Accounting Standards
on Preparers’ Judgments. Abacus, 40, 76-93.
Wahlen, J. (1994). The Nature of Information in Commercial Bank Loans Loss
Disclosures. The Accounting Review, 69, 455-478.
Wezel, T. (2010). Dynamic Loan Loss Provisions in Uruguay: Properties, Shock
Absorption Capacity and Simulations Using Alternative Formulas. International
Monetary Fund Working Paper No. 10/125.
Zhou, H., Xiong, Y. and Ganguli, G. (2010). Accounting Standards and Earnings
Management: Evidence from an Emerging Market. University of Texas Working
Paper, available at: https://www.researchgate.net/profile/haiyan_zhou4/
publication/241420854_accounting_standards_and_earnings_management_
evidence_from_an_emerging_market/links/02e7e52e3ec0b0932b000000/
accounting-standards-and-earnings-management-evidence-from-an-emergingmarket.
pdf.
Published
2019-02-28
How to Cite
Ashraf, A., Hassan, M. K., Putnam, K., & Turunen-Red, A. (2019). PRUDENTIAL REGULATORY REGIMES, ACCOUNTING STANDARDS, AND EARNINGS MANAGEMENT IN THE BANKING INDUSTRY. Buletin Ekonomi Moneter Dan Perbankan, 21(3), 367-394. https://doi.org/10.21098/bemp.v21i3.975
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