Economic Policy Uncertainty, Monetary Policy Uncertainty, and Bank Earnings Opacity

44 Pages Posted: 13 Mar 2020

See all articles by Justin Yiqiang Jin

Justin Yiqiang Jin

McMaster University - DeGroote School of Business

Kiridaran (Giri) Kanagaretnam

York University - Schulich School of Business

Yi Liu

State University of New York (SUNY) - State University of New York (SUNY) at Oswego

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Date Written: January 6, 2018

Abstract

Using a sample of U.S. banks and indices for economic policy uncertainty and monetary policy uncertainty developed by Baker et al. (2016), we investigate whether these two sources of policy uncertainty affect bank earnings opacity. When economic and monetary policies are relatively uncertain, it is easier for bank managers to distort financial information, as unpredictable policy changes make assessing the existence and impact of hidden “adverse news” more difficult for external stakeholders such as investors and creditors. Policy uncertainty also increases the fluctuation in banks’ earnings and cash flows, thus providing additional incentives and opportunities for bank managers to engage in earnings management. Our results show that uncertainty in economic policy and monetary policy are positively related to earnings opacity, proxied by the magnitude of discretionary loan loss provisions and the likelihood of just meeting or beating the prior year’s earnings, and negatively related to the level of accounting conservatism (i.e., the timeliness of recognition of bad news relative to good news). Collectively, our results suggest that economic policy uncertainty and monetary policy uncertainty lead to greater earnings opacity. We also find that the impact of policy uncertainty on financial reporting distortion is less pronounced for stronger banks (i.e., banks with high capital ratios).

Keywords: Economic policy uncertainty; Monetary policy uncertainty; Earnings opacity; Banking; Discretionary loan loss provisions

JEL Classification: G21; E52

Suggested Citation

Jin, Justin Y. and Kanagaretnam, Kiridaran and Liu, Yi and Lobo, Gerald J., Economic Policy Uncertainty, Monetary Policy Uncertainty, and Bank Earnings Opacity (January 6, 2018). 2018 Canadian Academic Accounting Association (CAAA) Annual Conference, Available at SSRN: https://ssrn.com/abstract=3097592 or http://dx.doi.org/10.2139/ssrn.3097592

Justin Y. Jin (Contact Author)

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905-525-9140 ext. 26194 (Phone)
905-521-8995 (Fax)

Kiridaran Kanagaretnam

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Yi Liu

State University of New York (SUNY) - State University of New York (SUNY) at Oswego ( email )

7060 NY-104
Oswego, NY 13126-3599
United States

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

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