Discretionary Accounting and the Behavior of Japanese Banks Under Financial Duress

Posted: 27 Aug 2014

See all articles by Ronald E. Shrieves

Ronald E. Shrieves

University of Tennessee, Knoxville - Department of Finance

Drew Dahl

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: July 2003

Abstract

This paper investigates utilization of discretionary accounting practices in the context of international bank regulation under the Basle Accord. Specifically, we explore implications of earnings management as a means of regulatory-capital arbitrage by Japanese banks during a period of financial duress, 1989-1996. Using a sample of 607 pooled time series and cross-sectional observations, we find evidence that Japanese banks’ lending was capital constrained, and that banks set gains on securities sales and loan-loss provisions in such a way as to smooth reported income and replenish regulatory capital. Our results support the hypothesis that the form of earnings management examined may have been instrumental in enabling some Japanese banks to comply with international capital regulation. We contend that this behavior is otherwise inexplicable on the basis of significant informational, tax or economic motivations.

Keywords: Regulatory-capital arbitrage, Accounting discretion, Capital regulation, Basle accord

JEL Classification: F34, F42, G28

Suggested Citation

Shrieves, Ronald E. and Dahl, Drew, Discretionary Accounting and the Behavior of Japanese Banks Under Financial Duress (July 2003). Journal of Banking and Finance, Vol. 27, No. 7, 2003, 1219-43, Available at SSRN: https://ssrn.com/abstract=2487327

Ronald E. Shrieves (Contact Author)

University of Tennessee, Knoxville - Department of Finance ( email )

Knoxville, TN 37996
United States

Drew Dahl

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

P.O. Box 442
St. Louis, MO 63166-0442
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
958
PlumX Metrics