Differential Earnings Management to Avoid Earnings Declines And Losses Across Publicly and Privately-Held Banks

24 Pages Posted: 11 Feb 2000

See all articles by Anne Beatty

Anne Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Bin Ke

National University of Singapore

Kathy R. Petroni

Michigan State University - Eli Broad College of Business and Eli Broad Graduate School of Management

Date Written: December 1999

Abstract

There is a documented empirical regularity that publicly-held firms report fewer small losses and fewer small declines in earnings than expected. This paper betters our understanding of this observed phenomenon by testing for this regularity on a sample of public and private banks during 1987-1998. We argue that the incentives to manage the earnings stream to achieve simple benchmarks such as positive earnings and increases in earnings should be higher for publicly-held banks. Consistent with our predictions we find that private banks with earnings near zero are significantly more likely to report losses than public banks with earnings near zero even after controlling for bank size, cash flows, and differences in the types of loans written. Similarly, private banks with changes in earnings that are near zero are significantly more likely than public banks to report a decline in earnings than an increase. In addition, we also find that the length of the string of consecutive earnings increases, even after controlling for the length of the string of consecutive increases in cash flows, is greater for public banks. These three tests all suggest that public banks face a greater incentive than private banks to achieve simple earnings benchmarks.

JEL Classification: M41, M43, G21

Suggested Citation

Beatty, Anne L. and Ke, Bin and Petroni, Kathy Ruby, Differential Earnings Management to Avoid Earnings Declines And Losses Across Publicly and Privately-Held Banks (December 1999). Available at SSRN: https://ssrn.com/abstract=204592 or http://dx.doi.org/10.2139/ssrn.204592

Anne L. Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Bin Ke

National University of Singapore ( email )

Mochtar Riady Building, BIZ 1, #07-54
15 Kent Ridge Drive
Singapore, 119245
Singapore
+6566013133 (Phone)

Kathy Ruby Petroni (Contact Author)

Michigan State University - Eli Broad College of Business and Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States
517-432-2924 (Phone)
517-432-1101 (Fax)

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