Bank Differences in the Coordination of Regulatory Capital, Earnings, and Taxes

Collins, Julie H.; Shackelford, Douglas A.; Wahlen, James M.

doi:10.2307/2491488

Cited by 560 publications

(402 citation statements)

References 4 publications

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“…Prior studies of earnings management in the banking industry have considered historical earnings as a target rather than the consensus analyst forecast (Beatty, Chamberlain, and Magliolo 1995;Collins, Shackelford, and Wahlen 1995). Management may use its discretion to beat historical earnings or to reduce the time-series volatility of earnings (i.e., income smoothing).…”

Section: Tests Of Earnings Management After the Adoption Datementioning

confidence: 99%

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Earnings Management Using the Valuation Allowance for Deferred Tax Assets under SFAS No. 109*

Schrand

Wong

2003

Contemporary Accting Res

201

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Statement of Financial Accounting Standards No. 109 ( SFAS No. 109 ) allows firms to use their discretion to set arbitrarily high valuation allowances against deferred tax assets. Firms can then later use these "hidden reserves" to manage earnings. Our evidence indicates that most banks do not record a valuation allowance to manage earnings, but rather to follow the guidelines of SFAS No. 109 . However, if the bank is sufficiently well capitalized to absorb the current-period impact on capital, then the amount of the valuation allowance increases with a bank's capital. In later years, bank managers adjust the valuation allowance to smooth earnings. The magnitude of the discretionary adjustment increases with the deviation of unadjusted earnings from the forecast or historical earnings. Keywords Banks; Deferred taxes; Discretion; Earnings management CondenséLes auteurs se demandent si les banques gèrent le bénéfice en constituant une provision pour moins-value élevée à l'égard des actifs d'impôts futurs ( deferred tax assets -DTA ) et en ajustant cette provision dans les exercices ultérieurs. Le Statement of Financial Accounting Standards n o 109 (SFAS 109) exige que les entreprises créent des provisions pour moinsvalue à l'égard des actifs d'impôts futurs. Au cours des exercices ultérieurs, les ajustements qui sont apportés à ces provisions sont passés en résultat, à titre d'élément de la charge totale d'impôts sur les bénéfices. Dans le cadre du débat suscité par la nouvelle norme, les analystes ont supposé que les entreprises, lorsqu'elles adoptaient le SFAS 109, pouvaient surestimer la provision pour moins-value et la radier ultérieurement, à des fins stratégiques, de façon à augmenter le bénéfice des exercices ultérieurs.Les entreprises pouvaient donc « dissimuler » la provision pour moins-value lors de l'adoption du SFAS 109, car l'ajustement cumulatif compte non tenu de la provision pour moins-value excédait, en général, le montant de la provision. Cette provision était cependant suffisamment importante pour offrir aux entreprises la possibilité de manipuler le bénéfice futur. La provision moyenne pour moins-value des banques de l'échantillon est de 0,09 $ par action (0,37 $ pour les banques de l'échantillon ayant fait état de provisions pour moins-value différentes de zéro), par rapport à un bénéfice par action total déclaré de 1,99 $, en moyenne. L'analyse porte sur un échantillon de sociétés de portefeuille bancaires faisant appel public à l'épargne (ci-après banques ). Les banques indiquent des montant considérables au titre des actifs d'impôts futurs et ont donc la possibilité de constituer de substantielles provisions pour moins-value. Leurs activités d'exploitation sont aussi relativement homogènes et elles sont sensibles aux conditions macroéconomiques. Ces facteurs renforcent le modèle des ajustements non discrétionnaires à la provision pour moins-value que proposent les auteurs.L'analyse que font les auteurs des décisions prises par les banques, au moment où elles ont adopté le SFAS 109...

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Section: Tests Of Earnings Management After the Adoption Datementioning

confidence: 99%

“…However, banks can also use other discretionary accruals, such as loan loss provisions, to manage earnings (Beatty et al 1995;Collins et al 1995). This specification issue biases against finding a significant association between deviations from the target and ∆VA.…”

Section: Car Vol 20 No 3 (Fall 2003)mentioning

confidence: 99%

Earnings Management Using the Valuation Allowance for Deferred Tax Assets under SFAS No. 109*

Schrand

Wong

2003

Contemporary Accting Res

201

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“…The main conclusions are sensitive to the choice of the sample and the specific econometric technique involved. For instance, Brady and Sinkey (1988), Ma (1988), Greenawalt and Sinkey (1988), Collins, Shackelford and Wahlen (1995), Bhat (1996), Kanagaretnam, Lobo and Matheu (2003), Bikker and Metzemakers (2005) and Laeven and Majnoni (2006), among others find evidence supporting this form of earnings management, while Scheiner (1981), Wetmore and Brick (1994), Beatty, Chamberlain and Magliolo (1995), Ahmed, Takeda and Thomas (1999) and Bouvatier and Lepetit (2008) do not.…”

Section: Introductionmentioning

confidence: 99%

Nonlinear dynamics in discretionary accruals: An analysis of bank loan-loss provisions

Balboa

López-Espinosa

Rubia

2013

Journal of Banking & Finance

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Several studies have characterized the relation between discretionary accruals and earnings before-taxes to test for the existence of earnings smoothing behaviors. In this paper, we argue that the characteristic response of accruals to earnings is not linear, as the literature has shown. Instead, it is likely to be driven by non-linear patterns since both the incentives to manipulate earnings and the practical way to do so depend, in part, on the relative size of earnings. Using a sample of 9,442 US banks in the period 1999-2008, this paper shows that bank managers tend to use provisions as a smoothing devise when earnings are substantial ("cookie-jar" strategies), engage in earningsdecreasing strategies when losses are relatively large ("big-bath" accounting) and, most of the time, use provisions as an earnings-increasing tool. Hence, it is shown that nonlinear specifications are more informative with regard to the different strategies employed to manipulate earnings. Abstract Several studies have characterized the relation between discretionary accruals and earnings before-taxes to test for the existence of earnings smoothing behaviors. In this paper, we argue that the characteristic response of accruals to earnings is not linear, as the literature has shown. Instead, it is likely to be driven by non-linear patterns since both the incentives to manipulate earnings and the practical way to do so depend, in part, on the relative size of earnings. Using a sample of 9,442 US banks in the period 1999-2008, this paper shows that bank managers tend to use provisions as a smoothing devise when earnings are substantial ("cookie-jar" strategies), engage in earningsdecreasing strategies when losses are relatively large ("big-bath" accounting) and, most of the time, use provisions as an earnings-increasing tool. Hence, it is shown that nonlinear specifications are more informative with regard to the different strategies employed to manipulate earnings. Marina Balboa

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“…Moreover, we expect banks that 2 Prior research suggests several motives for bank managers' discretionary behavior with respect to LLP, including signaling, capital management, management compensation, and income smoothing (Wahlen 1994;Collins et al 1995;Kanagaretnam et al 2004;Cheng et al 2011). are more conservative in their loan loss accounting to have a lower likelihood of failure during a financial crisis because of lower risk taking prior to the crisis as well as because they have a larger cushion against which to write off their loan losses during the crisis.…”

Section: Banksmentioning

confidence: 99%

Discretion in Bank Loan Loss Allowance, Risk Taking, and Earnings Management

2015

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We study whether bank managers' use their discretion in estimating the allowance for loan losses (ALL) for efficiency or for opportunistic reasons. We do so by examining whether the use of this discretion relates to bank stability and bank risk taking, or whether it relates to earnings management to meet or beat earnings benchmarks. We find that banks that had higher abnormal ALL during the period prior to the 2007-2009 financial crisis engaged in less risk taking during the pre-crisis period and had a lower probability of failure during the crisis period. In tests related to earnings management to meet or beat earnings benchmarks, we find that abnormal ALL is unrelated to next period's loss avoidance and just meeting or beating the prior year's earnings. Our results suggest that bank managers use their discretion over ALL for efficiency and not for opportunistic purposes. They inform policy makers and accounting standard setters on banks' use of accounting discretion as a means to build a cushion against future credit losses as they transition from the incurred loss model to the expected loss model for loan loss accounting.

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Bank Differences in the Coordination of Regulatory Capital, Earnings, and Taxes

Cited by 560 publications

References 4 publications

Earnings Management Using the Valuation Allowance for Deferred Tax Assets under SFAS No. 109*

Earnings Management Using the Valuation Allowance for Deferred Tax Assets under SFAS No. 109*

Nonlinear dynamics in discretionary accruals: An analysis of bank loan-loss provisions

Discretion in Bank Loan Loss Allowance, Risk Taking, and Earnings Management

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