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Capital and Earnings Management: Evidence from Alternative Banking Business Models

Marwa Elnahass, Marwan Izzeldin and Gerald Steele

The International Journal of Accounting, 2018, vol. 53, issue 1, 20-32

Abstract: This paper examines whether institutional characteristics distinguishing Islamic from conventional banks lead to distinctive capital and earnings management behavior through the use of loan loss provisions. In our sample countries, the two banking sectors operate under different regulatory frameworks: conventional banks currently apply the “incurred” loan loss model until 2018 whereas Islamic banks mandatorily adopt an “expected” loan loss model. Our results provide significant evidence of capital and earnings management practices via loan loss provisions in conventional banks. This finding is more prominent for large and loss-generating banks. By contrast, Islamic banks tend not to use loan loss provisions in either capital or earnings management, irrespective of the bank's size, earnings profile, or the structure of their loan loss model. This difference may be attributed to the constrained business model of Islamic banking, strict governance, and ethical orientation.

Keywords: IFRS; Regulatory capital management; Earnings management; Expected loan losses; Incurred loan losses (search for similar items in EconPapers)
JEL-codes: C23 G01 G21 G28 L50 M4 (search for similar items in EconPapers)
Date: 2018
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The International Journal of Accounting is currently edited by A. R. Abdel-Khalik

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Handle: RePEc:eee:accoun:v:53:y:2018:i:1:p:20-32