Do dynamic provisions reduce income smoothing using loan Loss provisions?

Daniel Pérez (), Vicente Salas-Fumás () and Jesús Saurina ()
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Daniel Pérez: Banco de España
Vicente Salas-Fumás: Universidad de Zaragoza and Banco de España

No 1118, Working Papers from Banco de España

Abstract: Spanish banks had to set aside a countercyclical loan loss provision during the period 2000 2004. The amount of such provision as well as the allowance accumulated had to be disclosed by banks. The former creates a natural experiment to test whether banks smooth earnings to mislead investors and other interested parties, or, by contrast, income smoothing is used to avoid the existence of market frictions. Using panel data econometric techniques, we find evidence of income smoothing through loan loss provisions during the period previous to the implementation of the countercyclical provision (1988-1999). However, during 2000-2004, banks relied only on the newly created countercyclical provision to smooth income. This change in behaviour suggests that there may be efficiency gains in reducing the volatility of accounting earnings over time.

Keywords: income smoothing; earnings management; transparency; countercyclical provisioning (search for similar items in EconPapers)
JEL-codes: G18 G21 M41 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2011-09
New Economics Papers: this item is included in nep-ban and nep-eec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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