The effect of leverage and liquidity on earnings and capital management: Evidence from U.S. commercial banks

Michael J. Gombola, Amy Yueh-Fang Ho and Chin-Chuan Huang

International Review of Economics & Finance, 2016, vol. 43, issue C, 35-58

Abstract: Prior research shows that firms can manage earnings aggressively through making accounting choices affecting discretionary current accruals surrounding equity offerings as a means of smoothing earnings over time. Some evidence indicates that aggressive earnings management carries over to aggressive management of capital structure in the form of higher leverage and aggressive management of working capital in the form of lower liquidity. Earnings management by banks is achieved instead by managing accruals dealing with payment behavior on loans: the loan loss provision and net charge-offs. A regulatory change expressed in the Basel III accords has tightened requirements on leverage and liquidity and could have affected earnings and capital management.

Keywords: Leverage; Liquidity; Abnormal loan loss provision; Earnings management; Capital management (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 M41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:43:y:2016:i:c:p:35-58

DOI: 10.1016/j.iref.2015.10.030

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