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What drives Bank Income Smoothing? Evidence from Africa

Peterson K Ozili

MPRA Paper from University Library of Munich, Germany

Abstract: We investigate whether banks use loan loss provisions to smooth income and whether this behaviour is influenced by foreign bank presence, ownership and institutional quality differences across African countries. We examine 370 banks from 21 African countries from 2002 to 2021. We find evidence that African banks use LLPs to smooth their income when they are more profitable during economic boom or recession. Income smoothing is persistent (i) among banks with a widely dispersed ownership, (ii) among banks with strong government ownership and (iii) among banks with weak government ownership. Income smoothing is also persistent in African countries that have greater corruption control, better regulatory quality and political stability. In contrast, moderate concentrated ownership reduces bank income smoothing. Bank income smoothing is reduced in African countries that have strong rule of law, high government effectiveness, strong foreign bank presence and strong voice and accountability institutions. The implication is that effective corporate governance and institutional quality can constrain the extent of income smoothing by African banks.

Keywords: Ownership concentration; foreign banks; income smoothing; loan loss provisions; Africa; institutional quality; banks; positive accounting theory; corporate governance (search for similar items in EconPapers)
JEL-codes: M40 M41 M42 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-acc, nep-afr and nep-fdg
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