Does Loan Loss Provision Signal Income Smoothing? – An Empirical Investigation of Indian Banking Industry

Santanu Das, Anurika Vaish and Utkarsh Goel

The IUP Journal of Accounting Research and Audit Practices, 2012, vol. XI, issue 2, 58-68

Abstract: The concept and legality of income smoothing is a much debated topic in the field of accounting. It is carried out to suit the requirements of a firm when it is to declare its financial results. There are many tools used by firms to smooth the income, and loss provision is one of them. Since it does not involve any cash outflow, firms find it a very potential tool for smoothing. This paper makes an attempt to study this behavior of firms (banks) in India. It finds that Indian banks too involve in smoothing necessitated by regulatory requirements, stock prices and most important of all, persistent performance. The smoothing behavior of public sector banks is quite different from that of the private sector banks. It is found that the loss provisions in public sector banks are higher than in its counterparts in the private sector. In the study, the pooled regression is found to be a better model than the fixed-effect model (FPooled > FFixed Effect) for analysis.

Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:icf:icfjar:v:11:y:2012:i:2:p:58-68

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