Accounting Discretion, Loan Loss Provision in Financial Distress: Evidence from Commercial Banks

Malik Amina (), Din Shahab Ud (), Shafi Khuram (), Butt Babar Zaheer () and Aziz Haroon ()
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Malik Amina: PhD Scholar, National Defence University, Islamabad, Pakistan.
Din Shahab Ud: Associate Professor, Management Sciences, Karakoram International University, Ghizer campus, Gilgit Baltistan, Pakistan.
Shafi Khuram: Associate Professor, Management Sciences, COMSATS University Islamabad, Pakistan E-mail: HYPERLINK “mailto:shafikhuram@yahoo.com”
Butt Babar Zaheer: Post Doctorate Research Fellow, Tohoku University of Community Service & Science, Japan.
Aziz Haroon: Senior Accounts Officer, All Pakistan Textile Mills Association.

Zagreb International Review of Economics and Business, 2022, vol. 25, issue 2, 1-18

Abstract: This study explores the association between earning management practices and financial distress in commercial banks. Earning management is measured through discretionary loan loss provisions and non-discretionary loan loss provisions. Modified Altman’s Z-score has been used as a proxy for financial distress. Panel regression with fixed and random effect has been employed for empirical analysis. The study finds a significant positive association between DLLP, NDLLP and financial distress in terms of the Altman Z-score. In the case of NDLLP, liquidity reduces the probability of financial distress. Whereas, a bank’s SIZE, LEVG and AQ enhance the likelihood of financial distress. The robustness tests were applied to find the association between NDLLP and FD using logistic regression to validate baseline estimates results of the random effect model. The findings of this study have implications for the policymakers, regulators and internal stakeholders to devise effective regulatory measures for well-informed investment decisions.

Keywords: Financial distress; Z-Score; Discretionary loan loss provisions and Non-discretionary loan loss provisions (search for similar items in EconPapers)
JEL-codes: G11 G21 G28 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:zirebs:v:25:y:2022:i:2:p:1-18:n:1001

DOI: 10.2478/zireb-2022-0012

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