Ozili, Peterson K (2019): Impact of IAS 39 reclassification on income smoothing by European banks. Forthcoming in: Journal of Financial Reporting and Accounting
Preview |
PDF
MPRA_paper_97035.pdf Download (716kB) | Preview |
Abstract
The article examines the impact of the reclassification of IAS 39 on income smoothing using loan loss provisions among European banks. The author predicts that the strict recognition and re-classification requirements of IAS 139 reduced banks' ability to smooth income using bank securities and derivatives, motivating them to rely more on loan loss provisions to smooth income. The findings do not support the prediction for income smoothing through loan loss provisions. Also, there is no evidence for income smoothing in the pre- and post-IAS 39 reclassification period. The implication of the findings is that: (i) European banks did not use loan loss provisions to smooth income during the period examined, and rather rely on other accounting numbers to smooth income; (ii) the IASB’s strict disclosure regulation improved the reliability and informativeness of loan loss provision estimates among European banks during the period of analysis.
Item Type: | MPRA Paper |
---|---|
Original Title: | Impact of IAS 39 reclassification on income smoothing by European banks |
English Title: | Impact of IAS 39 reclassification on income smoothing by European banks |
Language: | English |
Keywords: | Earnings Management; Income Smoothing; Loan loss provisions; IFRS, IAS 39; Financial Crises; disclosure regulation; banks; European banks; real earnings management; |
Subjects: | G - Financial Economics > G2 - Financial Institutions and Services > G20 - General G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M40 - General M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M41 - Accounting M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M42 - Auditing M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M48 - Government Policy and Regulation |
Item ID: | 97035 |
Depositing User: | Dr Peterson K Ozili |
Date Deposited: | 22 Nov 2019 08:55 |
Last Modified: | 22 Nov 2019 08:55 |
References: | Ahmed, A.S., Takeda, C. and Thomas, S. (1999), “Bank loan loss provisions: A reexamination of capital management, earnings management and signaling effects”, Journal of Accounting and Economics, Vol. 28, pp. 1-25. Anandarajan, A, Hasan, I, and McCarthy, C. (2007), “Use of loan loss provisions for capital, earnings management and signaling by Australian banks”, Accounting and Finance, Vol. 47, pp. 357-379. Ashraf, A., Hassan, M. K., and Putnam, K. (2014), “The Effects of Prudential Regulatory Regimes and Accounting Standards on Earnings Management of Loan Loss Provisions in the Banking Industry”, Cell, Vol. 301, pp. 338-0934. Balbao, M., López-Espinosa, G and Rubia, A. (2013), “Nonlinear dynamics in discretionary accruals: An analysis of bank loan-loss provisions”, Journal of Banking & Finance, Vol. 37 No. 12, pp. 5186-5207. Barth, M. E., Gomez-Biscarri, J., Kasznik, R., & López-Espinosa, G. (2017). Bank earnings and regulatory capital management using available for sale securities. Review of Accounting Studies, Vol 22 No. 4, pp. 1761-1792. Beatty, A. L., Ke, B., & Petroni, K. R. (2002). Earnings management to avoid earnings declines across publicly and privately held banks. The Accounting Review, Vol 77 No.3, pp. 547-570. Beatty, A., Chamberlain, S. L., and Magliolo, J. (1995), “Managing financial reports of commercial banks: The influence of taxes, regulatory capital, and earnings”, Journal of Accounting Research, Vol 33 No 2, pp. 231-261. Beaver, W. H., and Engel, E. E. (1996), “Discretionary behavior with respect to allowances for loan losses and the behavior of security prices”, Journal of Accounting and Economics, Vol. 22 No. 1, pp. 177-206. Burgstahler, D., and Dichev, I. (1997), “Earnings management to avoid earnings decreases and losses”, Journal of Accounting and Economics, Vol. 24 No. 1, pp. 99-126. Bushman, R. M., and Williams, C. D. (2015), “Delayed expected loss recognition and the risk profile of banks”, Journal of Accounting Research, Vol. 53 No. 3, pp. 511-553. Cohen, D. A., Dey, A., and Lys, T. Z. (2008), “Real and accrual-based earnings management in the pre-and post-Sarbanes-Oxley periods”, The Accounting Review, Vol. 83 No. 3, pp. 757-787. Cohen, D. A., and Zarowin, P. (2010), “Accrual-based and real earnings management activities around seasoned equity offerings”, Journal of Accounting and Economics, Vol. 50 No. 1, pp. 2-19. Dechow, P. M., Myers, L. A., and Shakespeare, C. (2010), “Fair value accounting and gains from asset securitizations: A convenient earnings management tool with compensation side-benefits”, Journal of Accounting and Economics, Vol. 49 No. 1, pp. 2-25. DeFond, M. L. (2010), “Earnings quality research: Advances, challenges and future research”, Journal of Accounting and Economics, Vol. 50 No. 2, pp. 402-409. El Sood, H., A. (2012), “Loan loss provisions and income smoothing in US banks pre and post the financial crisis”, International Review of Financial Analysis, Vol. 25, pp. 64-72. Garrett, J., Hoitash, R., & Prawitt, D. F. (2014). “Trust and financial reporting quality.” Journal of Accounting Research, Vol 52 No. 5, pp. 1087-1125. Hsu, P. H., & Lin, Y. R. (2016). Fair value accounting and Earnings Management. Eurasian Journal of Business and Management, Vol. 4 No.2, pp. 41-54. IASB. (2008), Reclassification of Financial Assets (Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures. Available at http://www.ifrs.org/News/Press-Releases/Documents/AmdmentsIAS39andIFRS7.pdf Kilic, E., Lobo, G. J., Ranasinghe, T., and Sivaramakrishnan, K. (2012), “The impact of SFAS 133 on income smoothing by banks through loan loss provisions”, The Accounting Review, Vol. 88 No.1, pp. 233-260. Kanagaretnam, K., Lobo, G.J and Mathieu, R. (2003), “Managerial Incentives for Income Smoothing through Bank Loan Loss Provisions”, Review of Quantitative Finance and Accounting, Vol. 20, No 1, pp. 63-80. Kanagaretnam, K, Lobo, G. J., and Yang, D. (2004), “Joint tests of signaling and income smoothing through bank loan loss provisions”, Contemporary Accounting Research, Vol. 21 No. 4, pp. 843-884. Kothari, S. P., Mizik, N., and Roychowdhury, S. (2012), “Managing for the moment: The role of real activity versus accruals earnings management in SEO valuation”, Working paper. Laeven, L., and Majnoni, G. (2003), “Loan loss provisioning and economic slowdowns: too much, too late?”, Journal of Financial Intermediation, Vol. 12 No. 2, pp. 178-197. Laux, C., & Leuz, C. (2010). Did fair-value accounting contribute to the financial crisis? Journal of economic perspectives, Vol. 24 No. 1, 93-118. Leventis, S., Dimitropoulos, P. E., and Anandarajan, A. (2011), “Loan loss provisions, earnings management and capital management under IFRS: The case of EU commercial banks”, Journal of Financial Services Research, Vol. 40 No. (1-2), pp. 103-122. Liu, C. C., and Ryan, S. G. (2006), “Income smoothing over the business cycle: Changes in banks' coordinated management of provisions for loan losses and loan charge-offs from the pre-1990 bust to the 1990s boom”, The Accounting Review, Vol. 81 No. 2, pp. 421-441. Lobo, G. J., and Yang, D. H. (2001), “Bank managers' heterogeneous decisions on discretionary loan loss provisions”, Review of Quantitative Finance and Accounting, Vol. 6, No. 3, pp. 223-250. Niu, F. F., and Richardson, G. D. (2006), “Are Securitizations in Substance Sales or Secured Borrowings? Capital‐Market Evidence”, Contemporary Accounting Research, Vol. 23 No. 4, pp. 1105-1133. Outa, E. R., Ozili, P., & Eisenberg, P. (2017). IFRS convergence and revisions: value relevance of accounting information from East Africa. Journal of Accounting in Emerging Economies, Vol 7 No. 3, pp. 352-368. Ozili, P.K and Outa, E.R (2017) Bank loan loss provisions research: a review. Borsa Istanbul Review Vol 17 No. 3, pp. 144-163 Ozili, P.K. (2017). Bank earnings smoothing, audit quality and procyclicality in Africa: the case of loan loss provisions. Review of Accounting and Finance, 16(2), 142-161 Ozili P.K and Thankom A.G. (2018). Income Smoothing among European systemic and non-system banks. The British Accounting Review Vol. 50, No. 5, 539-558 Ozili, P. K. and Outa, E. R. (2018a) "Bank income smoothing in South Africa: role of ownership, IFRS and economic fluctuation", International Journal of Emerging Markets, Vol. 13 No 5, pp.1372-1394 Ozili, P. K., & Outa, E. R. (2018b). Bank earnings smoothing during mandatory IFRS adoption in Nigeria. African Journal of Economic and Management Studies. https://doi.org/10.1108/AJEMS-10-2017-0266 Ozili, P. K. (2019). Non-performing loans and financial development: new evidence. The Journal of Risk Finance, Vol. 20 No. 1, pp.59-81. Penman, S. H. (2007). “Financial reporting quality: is fair value a plus or a minus?” Accounting and business research, Vol 37 No. 1, pp. 33-44. Roychowdhury, S. (2006), “Earnings management through real activities manipulation”, Journal of Accounting and Economics, Vol. 42 No. 3, pp. 335-370. Schrand, C. M., & Wong, M. F. (2003). Earnings management using the valuation allowance for deferred tax assets under SFAS No. 109. Contemporary Accounting Research, 20(3), 579-611. Song, C.J., Thomas, W.B., and Yi, H., 2010. Value relevance of FAS no.157 fair value hierarchy information and the impact of corporate governance mechanisms. The Accounting Review, Vol 85 No 4, pp.1375-1410. http://dx.doi.org/10.2308/accr.2010.85.4.13 Wall, L.D. and T.W. Koch (2000), “Bank Loan-Loss Accounting: A Review of Theoretical and Empirical Evidence”, Economic Review, Federal Reserve Bank of Atlanta. |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/97035 |