Managerial incentives and accounting quality: the role of ownership in banking

Abstract

PurposeThe study investigates the influence of managerial discretion over accruals on banks' financial reporting quality. Furthermore, it examines the role of ownership in shaping managerial incentives to manipulate banks’ reporting quality in a developing economy.Design/methodology/approachThe sample includes 37 Indian public- and private-sector banks from the fiscal year 2001–2022. The discretionary LLP (DLLP) is used to examine various managerial incentives and accounting quality. The models are estimated using panel fixed-effect regression and the system generalized method of moments. The results survive several sensitivity checks.FindingsThe results exhibit a low quality of financial reporting in public-sector banks, which is evident through the higher use of DLLP for income smoothing and signaling. In contrast, the low-capitalized private-sector banks employ DLLP to manage capital.Research limitations/implicationsThe study’s sample size is relatively small and focuses on a single country. Future researchers can investigate other emerging economies to better generalize the findings of this study.Practical implicationsThe study highlights the influential role of ownership in shaping managerial incentives in the banking industry. Moreover, the study is of utmost importance for governments, regulators and policymakers in devising policies that reduce agency conflicts and improve financial stability in emerging economies.Originality/valueThe study subscribes to the growing literature on the role of ownership in influencing the banks’ financial reporting quality. To the best of the author’s knowledge, this is one of the limited studies in the context of government-owned vs private-owned banks in an emerging economy.