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Nonlinear dynamics in discretionary accruals: An analysis of bank loan-loss provisions

Marina Balboa, Germán López-Espinosa () and Antonio Rubia

Journal of Banking & Finance, 2013, vol. 37, issue 12, 5186-5207

Abstract: Several studies have analyzed discretionary accruals to address earnings-smoothing behaviors in the banking industry. We argue that the characteristic link between accruals and earnings may be nonlinear, since both the incentives to manipulate income and the practical way to do so depend partially on the relative size of earnings. Given a sample of 15,268 US banks over the period 1996–2011, the main results in this paper suggest that, depending on the size of earnings, bank managers tend to engage in earnings-decreasing strategies when earnings are negative (“big-bath”), use earnings-increasing strategies when earnings are positive, and use provisions as a smoothing device when earnings are positive and substantial (“cookie-jar” accounting). This evidence, which cannot be explained by the earnings-smoothing hypothesis, is consistent with the compensation theory. Neglecting nonlinear patterns in the econometric modeling of these accruals may lead to misleading conclusions regarding the characteristic strategies used in earnings management.

Keywords: Earnings management; Income smoothing; Multi-way cluster; Panel data; Threshold regression (search for similar items in EconPapers)
JEL-codes: C21 C22 C23 G21 M41 (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:eee:jbfina:v:37:y:2013:i:12:p:5186-5207