Bank Earnings Smoothing, Audit Quality and Procyclicality in Africa: The Case of Loan Loss Provisions

Review of Accounting and Finance, Vol. 16, No. 2, 2017

29 Pages Posted: 28 Mar 2017

See all articles by Peterson K Ozili

Peterson K Ozili

University of Essex - Essex Business School; Central Bank of Nigeria

Date Written: March 2017

Abstract

This paper empirically examine whether the way African banks use loan loss provisions to smooth earnings is influenced by capital market motivations and the type of auditor after controlling for non-discretionary determinants of loan loss provisions and fluctuations in the business cycle. The findings support the income smoothing hypothesis and indicate that (i) African banks use loan loss provisions to smooth reported earnings; (ii) listed African banks use loan loss provisions to smooth earnings to a greater extent than non-listed African banks possibly for capital market reasons; (iii) income smoothing via loan loss provisions is not reduced among African banks with Big 4 auditor; and (iv) bank provisioning in Africa is procyclical with fluctuations in the business cycle. The findings have three implications. One, listed African banks smooth income because they are more visible to investors and investors do not view stock price fluctuation as a good signal. Securities market regulators in African countries should enforce strict disclosure rules that reduce earnings smoothing practices in order to improve the transparency of banks’ reported earnings in the region. Two, the presence of Big 4 auditor did not improve the informativeness of loan loss provisions estimates among African banks. Three, the evidence for procyclical provisioning suggest the need for dynamic loan loss provisioning system in Africa.

Keywords: Loan Loss Provisions, Earnings Management, Dynamic Provisioning, Income Smoothing, Audit Quality, Procyclicality, Africa, Banks, Economic Cycles

JEL Classification: G21, G28, M41, O55, N27

Suggested Citation

Ozili, Peterson Kitakogelu, Bank Earnings Smoothing, Audit Quality and Procyclicality in Africa: The Case of Loan Loss Provisions (March 2017). Review of Accounting and Finance, Vol. 16, No. 2, 2017. Available at SSRN: https://ssrn.com/abstract=2941022

Peterson Kitakogelu Ozili (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Central Bank of Nigeria ( email )

Plot 33, Abubakar Tafawa Balewa Way
Central Business District, Cadastral Zone
Abuja
Nigeria

Register to save articles to
your library

Register

Paper statistics

Downloads
89
rank
280,584
Abstract Views
707
PlumX Metrics