Discretionary Loan-Loss Provision Behavior in the US Banking Industry

Networks Financial Institute Working Paper 2018-WP-01

46 Pages Posted: 15 Feb 2018

See all articles by Dung Tran

Dung Tran

Banking University Ho Chi Minh city; IPAG Business School

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance

Reza Houston

Indiana State University - Scott College of Business

Date Written: January 20, 2018

Abstract

Earnings management can be either opportunistic, adding noise to reported earnings, or informative about a firm’s underlying economic performance, adding valuable information to financial reports. This study examines earnings management in banks with differing levels of information asymmetry. Specifically, we compare earnings management between public and private banks by using discretionary loan-loss provisions (DLLPs) as proxies. Employing a large dataset of US public and private banks from 1986:Q1 to 2013:Q4, this study provides evidence of stronger earnings management behavior in public banks versus private banks. The evidence remains robust under a battery of sensitivity tests. Since incentives for earnings management are more relevant within a specific context, we identify the conditions that motivate different earnings management incentives, which allows us to better observe specific managerial motives. Greater DLLPs observed in public banks are utilized to send private information to investors, consistent with the signaling hypothesis. We also find evidence that capital requirements alter DLLPs, consistent with the capital management hypothesis. Banks with relatively low (high) earnings tend to decrease (increase) their earnings through manipulation of DLLPs, inconsistent with our income-smoothing hypothesis. The study extends to current debates on earnings management between public and private firms, and also provides a better understanding of the determinants of earnings management.

Keywords: bank listing status; discretionary loan loss provisions; earnings management

JEL Classification: G21, G28, G34, G38

Suggested Citation

Tran, Dung and Hassan, M. Kabir and Houston, Reza, Discretionary Loan-Loss Provision Behavior in the US Banking Industry (January 20, 2018). Networks Financial Institute Working Paper 2018-WP-01, Available at SSRN: https://ssrn.com/abstract=3118012 or http://dx.doi.org/10.2139/ssrn.3118012

Dung Tran (Contact Author)

Banking University Ho Chi Minh city ( email )

36 Ton That Dam
District 1
Ho Chi Minh
Vietnam

HOME PAGE: http://https://sites.google.com/buh.edu.vn/dungtran/

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006
France

M. Kabir Hassan

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Reza Houston

Indiana State University - Scott College of Business ( email )

800 Sycamore Street
Terre Haute, IN 47809
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
115
Abstract Views
1,034
rank
275,235
PlumX Metrics