Earnings Conservatism and Litigation Exposure in the Banking Industry

Spanish Journal of Finance and Accounting (REFC), Forthcoming

34 Pages Posted: 20 Mar 2011

See all articles by Borja Amor-Tapia

Borja Amor-Tapia

Universidad de León

Carolina Bona‐Sánchez

University of Las Palmas de Gran Canaria

Jerónimo Pérez Alemán

Universidad de Las Palmas de Gran Canaria

Maria T. Tascón

Universidad de León

Date Written: March 15, 2011

Abstract

This paper examines the effect of managers’ liability exposure on earnings conservatism in the banking industry. Focusing on a wide international sample of commercial banks and using TIER1 as a proxy of bank managers’ exposure to litigation, our results show a negative relationship between the level of TIER1 and earnings conservatism. We interpret these results as evidence of an increase in bank managers’ liability exposure increasing earnings conservatism. Moreover, we find that this negative relationship holds for both, those banks with a TIER1 below the median country level of TIER1 (low-TIER1 banks) and those with a TIER1 above the median country level of TIER1 (high-TIER1 banks), even though it is less pronounced for the former group. Thus, although it is expected that higher public scrutiny scenarios in the banking industry (low-TIER1 banks) trigger a higher degree of unconditional conservatism, they do not prevent managers from resorting to earnings conservatism in an attempt to minimize not only litigation costs but also the likelihood of adverse political action.

Keywords: Commercial Banks, Capital Adequacy, Earnings Conservatism, TIER1, Panel Data Analysis

JEL Classification: G21, G28, M4, D4

Suggested Citation

Amor-Tapia, Borja and Bona Sánchez, Carolina and Perez Aleman, Jeronimo and Tascon, Maria Teresa, Earnings Conservatism and Litigation Exposure in the Banking Industry (March 15, 2011). Spanish Journal of Finance and Accounting (REFC), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1786352

Borja Amor-Tapia (Contact Author)

Universidad de León ( email )

Leon, 24071
Spain
(+34) 987291000 (Phone)

Carolina Bona Sánchez

University of Las Palmas de Gran Canaria ( email )

C/Juan de Quesada, No. 30
Las Palmas de Gran Canaria, Las Palmas 35017
Spain

Jeronimo Perez Aleman

Universidad de Las Palmas de Gran Canaria ( email )

C/Juan de Quesada, No. 30
Las Palmas de Gran Canaria, Las Palmas 35017
Spain

Maria Teresa Tascon

Universidad de León ( email )

Leon, 24071
Spain

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