Prudential Supervisors’ Independence and Income Smoothing in European Banks

56 Pages Posted: 16 May 2018 Last revised: 1 May 2019

See all articles by Beatriz Garcia Osma

Beatriz Garcia Osma

Universidad Carlos III de Madrid - Department of Business Administration

Araceli Mora

University of Valencia - Department of Accounting

Luis Porcuna-Enguix

University of Valencia

Date Written: February 22, 2019

Abstract

We investigate the role of prudential supervisors’ independence in affecting income smoothing behavior in European banks. Powerful national supervisors are predicted to influence the accounting practices of their supervised entities, shaping the properties of the accounting numbers they prepare. In particular, we study whether greater independence of powerful supervisors from the government and from the industry is associated with lower income smoothing. We use the mandatory adoption of a single set of accounting standards in Europe as a shock to the influence of prudential supervisors over national banks’ accounting practice. Our results confirm that political and industry independence of the supervisor are important determinants of income smoothing. This suggests that independence of prudential supervisors is a desirable governance characteristic, with positive impacts on financial transparency.

Keywords: Income Smoothing; Prudential Supervisors; Independent Supervisors; European Banking Industry; IAS 39; Single Supervisory Mechanism

JEL Classification: G21; G38; M40

Suggested Citation

Garcia Osma, Beatriz and Mora, Araceli and Porcuna-Enguix, Luis, Prudential Supervisors’ Independence and Income Smoothing in European Banks (February 22, 2019). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3172753 or http://dx.doi.org/10.2139/ssrn.3172753

Beatriz Garcia Osma

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Araceli Mora (Contact Author)

University of Valencia - Department of Accounting ( email )

Edificio Departamental Oriental
Avda. dels Tarongers, s/n
Valencia 46071
Spain

Luis Porcuna-Enguix

University of Valencia ( email )

Avda. de los Naranjos s/n
Valencia, Valencia E-46022
Spain

Register to save articles to
your library

Register

Paper statistics

Downloads
125
Abstract Views
1,302
rank
229,688
PlumX Metrics