Earnings Management to Avoid Earnings Declines Across Publicly and Privately Held Banks

Posted: 14 Mar 2002

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

Abstract

This study compares samples of publicly and privately held bank holding companies to examine whether the high frequency of small earnings increases relative to small earnings decreases reported by public firms is attributable to earnings management. We expect public banks' shareholders to be more likely than private banks' shareholders to rely on simple earnings-based heuristics in evaluating firm performance, so we expect public banks to have more incentives to report steadily increasing earnings. Consistent with this expectation, we find that relative to private banks, public banks: (1) report fewer small earnings declines, (2) are more likely to use the loan loss provision and security gain realizations to eliminate small earnings decreases, and (3) report longer strings of consecutive earnings increases. These results suggest that the asymmetric pattern of more small earnings increases than decreases, first documented by Burgstahler and Dichev (1997), is attributable to earnings management and is not simply a reflection of the underlying distribution of earnings changes.

JEL Classification: M41, M43, G21

Suggested Citation

Beatty, Anne L. and Ke, Bin and Petroni, Kathy Ruby, Earnings Management to Avoid Earnings Declines Across Publicly and Privately Held Banks. The Accounting Review, July 2002. Available at SSRN: https://ssrn.com/abstract=298040

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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