Loan loss provisions, accounting constraints, and bank ownership structure

Balla, Eliana; Rose, Morgan J.

doi:10.1016/j.jeconbus.2014.12.003

Cited by 38 publications

(31 citation statements)

References 30 publications

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“…Therefore, bank managers' awareness of these expectations would provide incentive for the manager to smooth his income to avoid sending a negative signal to investors and regulators regarding the bank's prospects. The extent of income smoothing by a bank manager would also depend on existing accounting regulations and the accounting number used to achieve income smoothing, among other factors (Leventis et al, 2011;Ahmed et al, 2013;Balla and Rose, 2015). For instance, loan loss provision is well-documented in the literature as a tool used by banks to smooth reported earnings, however, the extent of earnings smoothing is also influenced by disclosure rules.…”

Section: Earnings Smoothingmentioning

confidence: 99%

Bank earnings smoothing during mandatory IFRS adoption in Nigeria

Ozili¹,

Outa

2019

AJEMS

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We examine the extent of bank earnings smoothing during mandatory IFRS adoption in Nigeria, to determine whether mandatory IFRS adoption increased or decreased income smoothing among Nigerian banks. We find that the mandatory adoption of International Financial Reporting Standards (IFRS) is associated with lower earnings smoothing among Nigerian banks, which implies that Nigerian banks do not use loan loss provisions to smooth reported earnings during the mandatory IFRS adoption period. We find evidence for earnings smoothing via LLP during voluntary IFRS adoption. Earnings smoothing is not significantly associated with listed and non-listed Nigerian banks during voluntary and mandatory IFRS adoption. Overall, the findings indicate that mandatory IFRS adoption improves the informativeness and reliability of loan loss provisions estimate by discouraging Nigerian banks from influencing loan loss provisions for earnings smoothing purposes during the mandatory IFRS adoption. The findings of this paper are relevant to the debate on whether IFRS reporting improves the quality of financial reporting among firms in Nigeria. The implication of the study is that IFRS has higher accounting quality than local GAAP in Nigeria as it improves the quality and informativeness of accounting numbers (LLPs and earnings) reported by Nigerian banks during the period examined.

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Section: Earnings Smoothingmentioning

confidence: 99%

Bank earnings smoothing during mandatory IFRS adoption in Nigeria

Ozili¹,

Outa

2019

AJEMS

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“…They find evidence that US banks use LLPs to smooth earnings when accounting disclosure regulation made it difficult to use derivatives to smooth bank earnings. Other US studies include: Balla and Rose (2015), Dou et al (2016), Morris, Kang, and Jie (2016), etc. To sum up, above studies suggest that the propensity for banks to use LLPs for income smoothing purposes depends on (i) the size of earning or the earnings distribution, (ii) the state of economy particularly during recessions or crisis periods, (iii) strict accounting disclosure rules intended to discourage the manipulation of bank accruals, as well as (iv) regulatory capital requirements.…”

Section: Us Studiesmentioning

confidence: 99%

“…Leventis et al (2011) show that income smoothing via LLP is reduced after IFRS adoption. Balla and Rose (2015) examine whether accounting constraints introduced by the US SEC in 1998 limit LLP-based income smoothing among US banks and find that shortly after the SEC enforced the accounting constraint the relationship between LLPs and earnings weakened for publiclyheld banks but not for privately-held banks, implying reduced income smoothing. Abdul Adzis et al (2016) investigate the impact of IAS 39 among banks in Hong Kong and find that bank income smoothing via LLP is reduced after the adoption and compliance with IAS 39.…”

Section: Constraint To Smooth Incomementioning

confidence: 99%

Bank Loan Loss Provisions Research: A Review

Ozili¹,

Outa

2017

SSRN Journal

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We review the recent academic and policy literature on bank loan loss provisioning (LLP) to identify several advances in the literature, to highlight some challenges in LLP research and suggest possible directions for future research with some concluding remarks. Among other things, we observe some major advancement in country-specific and cross-country analyses and substantial interaction between LLPs and existing prudential, accounting, institutional firm characteristic, cultural, religious, tax and fiscal framework. We observe that managerial discretion in provisioning does not necessarily generate LLP estimates that reflect the true and underlying economic reality of banks' credit risk exposure but rather managerial discretion in provisioning is strongly linked to income smoothing, capital management, signalling and other objectives. We also address several issues including the ethical dimensions of income smoothing, motivations and constrains to income smoothing, methodological issues in the bank loan loss provisions literature and the dynamic loan loss provisioning experiment. Moreover, we suggest several avenues for further research such as: finding a balance between sufficient LLPs which regulators want versus transparent LLPs which standard setters want; the sensitivity of abnormal (specific and general) LLPs to changes in equity; the persistence of abnormal LLPs following CEO exit; country-specific interventions that induce LLP procyclicality in emerging countries; investigating LLP behaviour in the post-financial crisis sample period; the impact of Basel III on banks' provisioning discretion; LLP behaviour among systemic and non-systemic financial institutions; etc. We conclude that, because provisioning models are only as good as the assumptions underlying such models as well as the accuracy of the inputs included in such models, regulators need to pay attention to how much discretion banks and lending institutions should have in determining reported provision estimates, and this has been a long standing issue.

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“…Public entities face more short-term profit pressure than private entities and focus more on periodic performance measures (Narayanan 1985;Stein 1989;Shleifer and Vishny 1990;Bushee 1998;Asker et al 2015). As a result, when bank profits are high, public banks are more incentivized than private banks to overestimate the ALLL to smooth earnings (Balla and Rose 2015). But 13 when facing profit declines, public banks are more incentivized to underprovision (Beatty et al 2002).…”

Section: Predictionsmentioning

confidence: 99%

“…Because periodic performance measures, such as earnings and equity capital, are more important to public banks than to private banks, the incentives to misreport the ALLL are intensified among public banks (e.g., Balla and Rose 2015;Beatty et al 2002). Effective bank supervision should restrict banks from 4 misreporting the ALLL, no matter how incentivized the banks are.…”

Section: Introductionmentioning

confidence: 99%

Is Bank Supervision Effective? Evidence from the Allowance for Loan and Lease Losses

Yang

2016

SSRN Journal

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Loan loss provisions, accounting constraints, and bank ownership structure

Cited by 38 publications

References 30 publications

Bank earnings smoothing during mandatory IFRS adoption in Nigeria

Bank earnings smoothing during mandatory IFRS adoption in Nigeria

Bank Loan Loss Provisions Research: A Review

Is Bank Supervision Effective? Evidence from the Allowance for Loan and Lease Losses

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