Managing Financial Reports of Commercial Banks: The Influence of Taxes, Regulatory Capital and Earnings

Posted: 22 Aug 1998

See all articles by Anne Beatty

Anne Beatty

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

Sandra Chamberlain

University of British Columbia (UBC) - Division of Accounting

Joseph Magliolo

Southern Methodist University (SMU) - Accounting Department

Abstract

This paper examines whether managerial discretion over loan loss accruals, accounting related transactions such as sales of investment securities, and financing transactions are used to manage capital, earnings or taxes. We model discretion over these decisions using a system of five equations generating from an underlying cost minimization problem. The estimated parameters of the system suggest that banks manage both capital and earnings using accounting, investment and financing discretion exercised over these transactions. The framework we use highlights trade-offs among accounting and financing transactions. We find that accounting sources of capital in part determine banks' propensity to issue new securities and that the positive reported capital effects of gains from transactions such as asset sales in part determine managers' willingness to charge-off loans.

JEL Classification: M41, G21

Suggested Citation

Beatty, Anne L. and Chamberlain, Sandra L. and Magliolo, Joseph, Managing Financial Reports of Commercial Banks: The Influence of Taxes, Regulatory Capital and Earnings. Sauder School of Business Working Paper. Available at SSRN: https://ssrn.com/abstract=2513

Anne L. Beatty (Contact Author)

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

2100 Neil Avenue
Columbus, OH 43210
United States

Sandra L. Chamberlain

University of British Columbia (UBC) - Division of Accounting ( email )

2053 Main Hall
Vancouver, British Columbia V6T 1Z2
Canada
604-822-8531 (Phone)
604-822-9470 (Fax)

Joseph Magliolo

Southern Methodist University (SMU) - Accounting Department ( email )

United States
214-768-1678 (Phone)
214-768-4099 (Fax)

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