Banking sector earnings management using loan loss provisions in the Fintech era

Peterson Ozili

International Journal of Managerial Finance, 2020, vol. 18, issue 1, 75-93

Abstract: Purpose - This paper analyzes banking sector earnings management using loan loss provisions (LLPs) in the Fintech era. Design/methodology/approach - Regression methodology was used to examine earnings management in the Fintech era. Findings - The findings show evidence for bank income smoothing using LLPs. There is greater income smoothing in the second-wave Fintech era compared to the first-wave Fintech era, and the presence of strong institutions did not lower income smoothing in the second-wave era. Bank income smoothing is also greater in (1) Bank of International Settlement (BIS) and EU countries than in non-EU countries and G7 countries, (2) well-capitalized banking sectors and (3) during economic booms in the second-wave Fintech era. Practical implications - The competition for loans and deposits by banks and Fintech lenders in the second-wave Fintech era created additional incentives for banks to engage in income smoothing to report competitive and stable earnings. Originality/value - The study uses a unique approach to detect country-level earnings management in the banking sector. Also, this study extends the bank earnings management literature by introducing the Fintech era as a determinant of the extent of bank earnings management.

Keywords: Banking sector; Income smoothing; Regulatory quality; Legal quality; Market power; Fintech; Nonperforming loans; Earnings smoothing; Loan loss provisions; Earnings management; Digital finance; G21; G28 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Banking sector earnings management using loan loss provisions in the Fintech era (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:ijmf-07-2020-0369

DOI: 10.1108/IJMF-07-2020-0369

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