Purpose This study aims to examine the effect of equity incentives on earnings management that occurs via the use of loan loss provisions by using a sample of 204 bank-year observations over the period 2006-2011. Design/methodology/approach The authors use the data of 39 European banks to test the main hypothesis. Several valuation models and regressions are used to measure the main proxies for executives’ compensation and the determinant factors of loan loss provisions. Findings The empirical results reveal that earnings management that occurs via discretionary loan loss provisions is associated with equity incentives in the banking industry. In particular, European banks’ executives with high equity incentives are found to manage reported earnings upwards by reducing loan loss provisions. The results therefore show that income-increasing earnings management via discretionary loan loss provisions is widely practised by the executives of European banks and that this is partly motivated by executives’ compensation. Practical implications The findings of this paper present important implications for regulators in the European Union, who should take further steps to reform the regulatory environment to monitor and mitigate the earnings management practices that occur via the manipulation of loan loss provisions. Earnings management practices do not just negatively affect subsequent performance but are also found to lead to firms’ failure. Thus, regulators should take the necessary reforms to protect the wealth of stakeholders (investors, creditors, etc.). Originality/value This study provides the first evidence on the relationship between equity incentives and earnings management in the European banking industry. The study sheds more light on an issue of great interest to a broad audience that does not receive much attention in the prior research, thus opening new avenues for future research.

This paper aimed to investigate the relationship between financial inclusion and tax revenue using measures from the Global Findex database for a sample of 28 European countries between 2011- 2017. The data were analysed using panel data methodology. The number of people who are financially included in this observed period might increase over time, which would create more income and in turn lead to higher tax contributions to the government. We found strong evidence to suggest that financial inclusion represents one of the determinants of tax revenue in European countries. Results of the analysis show positive and significant impact of financial inclusion as measured by Bank account (% of age +15) and credit card ownership (% age 15+) on tax revenues measures. The results are robust using several sources of taxation. The findings suggest that higher financial inclusion is associated with more tax revenue. These results should be of great interest to regulators and policymakers to take advantage of the developments on financial inclusion.

Previous literature supports the view that the financial inclusion leads to economic growth and helps alleviate poverty; however, it is still unclear whether financial inclusion increases bank profitability. The study assumes that financial inclusion is significant in enhancing the economy and minimizing loan accounts, and along with this assumption, the deposit size decreases the Jordanian banks’ profitability despite the fact that the financial services and access to them have no significant influence upon such profitability. The major profitability drivers examined in this study comprised financial inclusion and financial leverage. In this study, 13 Jordanian banks’ data from 2009 to 2019 were examined to determine the above issue. The study applied fixed effects on a panel data regression model. The findings indicated that the number of loan accounts and size of deposits negatively and significantly impacted the profitability of the commercial banks in Jordan. However, the number of branches and ATMs had no significant effect on the bank’s profitability. In sum, both leverage and bank size were the top two determinants of commercial banks’ profitability in Jordan. Based on the findings, Jordanian policymakers can shift their focus to offering affordable financial services that support SMEs’ loans and start-ups.

The use of stock options and credit default swaps (CDS) in banks is not uncommon. Stock options can induce risk-taking incentives, while CDS can be used to hedge against credit risk. Building on the existing literature on executive compensation and risk management, our study contributes novel empirical support for the role of stock options in restraining the use of CDS for hedging purposes. Based on data of CEO stock options and CDS held by 60 European banks during the period 2006-2011, we find a negative relationship between option-induced risktaking incentives (vega) and the proportion of CDS held for hedging. However, the extent of CDS held for hedging is found to be positively related to default risk in the period leading to the financial crisis that erupted in 2007. The findings imply that restraining the use of stock options can incentivize hedging with CDS, but this risk management strategy will not necessarily produce lower default risk in times of systemic credit crisis.

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