Financial Statement Comparability, Earnings Smoothing and Loan-Loss Provisioning in Banking

42 Pages Posted: 1 Jul 2020

See all articles by Ahsan Habib

Ahsan Habib

Massey University - School of Accountancy; Massey University

Mostafa Monzur Hasan

Macquarie University

Sabur Mollah

Sheffield University Management School, University of Sheffield; Swansea Management School, Swansea University; Hull University Business School; Hull University Business School

Philip Molyneux

University of Sharjah; University of Sharjah - College of Business Administration

Date Written: June 9, 2020

Abstract

We investigate the effect of financial statement comparability on banks’ earnings smoothing behavior through loan-loss provisioning. Financial statement comparability makes information about peers accessible to outside investors and, thereby, improves transparency and the information environment. We, therefore, predict a negative association between financial statement comparability and earnings smoothing for opportunistic reasons. Based on a sample of 628 US banks (4,683 bank-years observations) for the period 1999-2013, we show that financial statement comparability constrains income smoothing through loan-loss provisioning. We further reveal that this constraining effect is more pronounced for larger banks and during the global financial crisis (GFC) period. These results are robust to alternative specifications of comparability and earning management, bank (firm) fixed effect regression, and also dealing with endogeneity issues. We contribute to the literature on the benefits of producing comparable financial statements, as well as to the literature on the determinants of earnings smoothing by banks. Our results are also relevant for standard setters who stress the importance of financial statement comparability for nurturing investor confidence.

Keywords: Financial Statement Comparability; Earnings Smoothing; Loan-Loss Provision; Global Financial Crisis

JEL Classification: G21, G29, G010

Suggested Citation

Habib, Ahsan and Hasan, Mostafa Monzur and Mollah, Sabur and Molyneux, Philip and Molyneux, Philip, Financial Statement Comparability, Earnings Smoothing and Loan-Loss Provisioning in Banking (June 9, 2020). Available at SSRN: https://ssrn.com/abstract=3622974 or http://dx.doi.org/10.2139/ssrn.3622974

Ahsan Habib

Massey University - School of Accountancy ( email )

Auckland
New Zealand

Massey University ( email )

Auckland
New Zealand

Mostafa Monzur Hasan

Macquarie University ( email )

Level 3, Building 4ER,
Sydney, NSW 2109
Australia

HOME PAGE: http://https://researchers.mq.edu.au/en/persons/mostafa-hasan

Sabur Mollah (Contact Author)

Sheffield University Management School, University of Sheffield ( email )

Conduit Road
Sheffield, Sheffield S10 1FL
United Kingdom

Swansea Management School, Swansea University ( email )

Singleton Park
Swansea, Wales SA2 8PP
United Kingdom

Hull University Business School ( email )

Cottingham Road
Hull, Great Britain HU6 7RX
United Kingdom

Hull University Business School ( email )

Cottingham Road
Hull, Hull HU6 7RX
United Kingdom

Philip Molyneux

University of Sharjah - College of Business Administration ( email )

University City Road
Sharjah, 27272
United Arab Emirates

University of Sharjah ( email )

College of Business Administration
University of Sharjah
Sharjah, Sharjah
United Arab Emirates

HOME PAGE: http://www.sharjah.ac.ae/en/academics/Colleges/business/Pages/ppl_detail.aspx?mcid=1

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