Discretionary Loan-Loss Provision Behavior in the US Banking Industry

Dung Tran, M. Kabir Hassan and Reza Houston

No 2018-WP-01, NFI Working Papers from Indiana State University, Scott College of Business, Networks Financial Institute

Abstract: Earnings management can be either opportunistic, adding noise to reported earnings, or informative about a firm’s underlying economic performance, adding valuable information to financial reports. This study examines earnings management in banks with differing levels of information asymmetry. Specifically, we compare earnings management between public and private banks by using discretionary loan-loss provisions (DLLPs) as proxies. Employing a large dataset of US public and private banks from 1986:Q1 to 2013:Q4, this study provides evidence of stronger earnings management behavior in public banks versus private banks. The evidence remains robust under a battery of sensitivity tests. Since incentives for earnings management are more relevant within a specific context, we identify the conditions that motivate different earnings management incentives, which allows us to better observe specific managerial motives. Greater DLLPs observed in public banks are utilized to send private information to investors, consistent with the signaling hypothesis. We also find evidence that capital requirements alter DLLPs, consistent with the capital management hypothesis. Banks with relatively low (high) earnings tend to decrease (increase) their earnings through manipulation of DLLPs, inconsistent with our income-smoothing hypothesis. The study extends to current debates on earnings management between public and private firms, and also provides a better understanding of the determinants of earnings management.

Keywords: Bank listing status; Discretionary loan loss provisions; Earnings management (search for similar items in EconPapers)
JEL-codes: G21 G28 G34 G38 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2018-01
New Economics Papers: this item is included in nep-ban and nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Discretionary loan loss provision behavior in the US banking industry (2020)
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