Prudential supervisors’ independence and income smoothing in European banks

Beatriz Garcia Osma, Araceli Mora and Luis Porcuna-Enguix

Journal of Banking & Finance, 2019, vol. 102, issue C, 156-176

Abstract: We investigate the role of prudential supervisors’ independence in affecting income smoothing behavior in European banks. Powerful national supervisors are predicted to influence the accounting practices of their supervised entities, shaping the properties of the accounting numbers they prepare. In particular, we study whether greater independence of powerful supervisors from the government and from the industry is associated with lower income smoothing. We use the mandatory adoption of a single set of accounting standards in Europe as a shock to the influence of prudential supervisors over national banks’ accounting practice. Our results confirm that political and industry independence of the supervisor are important determinants of income smoothing. This suggests that independence of prudential supervisors is a desirable governance characteristic, with positive impacts on financial transparency.

Keywords: Income smoothing; Prudential supervisors; Independent supervisors; European banking industry; IAS 39; Single supervisory mechanism (search for similar items in EconPapers)
JEL-codes: G21 G38 M40 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:102:y:2019:i:c:p:156-176

DOI: 10.1016/j.jbankfin.2019.03.001

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