Capital and Earnings Management: Evidence from Alternative Banking Business Models

The International Journal of Accounting, Volume 53, Issue 1, March 2018, Pages 20-32

Posted: 17 May 2019

See all articles by Marwa Elnahass

Marwa Elnahass

Newcastle University Business School

Marwan Izzeldin

Lancaster University Management School

G R Steele

Lancaster University - Department of Economics

Date Written: March 12, 2018

Abstract

This paper examines whether institutional characteristics distinguishing Islamic from conventional banks lead to distinctive capital and earnings management behavior through the use of loan loss provisions. In our sample countries, the two banking sectors operate under different regulatory frameworks: conventional banks currently apply the “incurred” loan loss model until 2018 whereas Islamic banks mandatorily adopt an “expected” loan loss model. Our results provide significant evidence of capital and earnings management practices via loan loss provisions in conventional banks. This finding is more prominent for large and loss-generating banks. By contrast, Islamic banks tend not to use loan loss provisions in either capital or earnings management, irrespective of the bank’s size, earnings profile, or the structure of their loan loss model. This difference may be attributed to the constrained business model of Islamic banking, strict governance, and ethical orientation.

Keywords: IFRS, Regulatory Capital management, Earnings management, Expected loan losses, Incurred loan losses

JEL Classification: C23, G01, G21, G28, L50, M4

Suggested Citation

Elnahass, Marwa and Izzeldin, Marwan and Steele, Gerald R, Capital and Earnings Management: Evidence from Alternative Banking Business Models (March 12, 2018). The International Journal of Accounting, Volume 53, Issue 1, March 2018, Pages 20-32. Available at SSRN: https://ssrn.com/abstract=3371219

Marwa Elnahass (Contact Author)

Newcastle University Business School ( email )

5 Barrack Road
Newcastle University Business School
Newcastle Upon Tyne, NE1 4SE
United Kingdom

Marwan Izzeldin

Lancaster University Management School ( email )

Lancaster, LA1 4YX
United Kingdom
01524 594674 (Phone)

HOME PAGE: http://www.lums.lancs.ac.uk/profiles/marwan-izzeldin/

Gerald R Steele

Lancaster University - Department of Economics ( email )

Lancaster, LA1 4YX
United Kingdom
01524594210 (Phone)

HOME PAGE: http://www.lancs.ac.uk/staff/ecagrs/

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