The Influence of Accounting Enforcement on Earnings Quality of Banks: Implications of Bank Regulation and the Global Financial Crisis

Posted: 20 Jul 2020

See all articles by Lorenzo Dal Maso

Lorenzo Dal Maso

affiliation not provided to SSRN

Kiridaran (Giri) Kanagaretnam

York University - Schulich School of Business

Gerald J. Lobo

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

Simone Terzani

University of Perugia - Department of Economics

Date Written: 2018

Abstract

We study the effects of country-level accounting enforcement on earnings quality of banks and whether bank regulation substitutes or complements the effect of accounting enforcement on bank earnings quality. We also examine whether the influence of accounting enforcement on bank earnings quality changed after the global financial crisis. Using a sample of listed banks from 40 countries between 2001 and 2014, and abnormal loan loss provisions (ALLP) as our main proxy for earnings quality, we document a consistent and strong association between accounting enforcement and bank earnings quality. More specifically, an increase in accounting enforcement decreases the level of ALLP and decreases the propensity to manage earnings to avoid losses. Furthermore, we provide empirical evidence that bank regulation complements the effect of accounting enforcement on bank earnings quality. Finally, unlike in the pre-crisis period, we find a positive association between accounting enforcement and income-decreasing ALLP in the post-crisis period, which indicates that stronger accounting enforcement is associated with more conservative earnings and higher loan loss reserves. Our results indicate that accounting enforcement reduces opportunistic earnings management.

Keywords: Accounting enforcement, Bank regulation, Earnings quality, Loan loss provisions, Earnings benchmarks, Global financial crisis

JEL Classification: G34, G38, M41, M48

Suggested Citation

Dal Maso, Lorenzo and Kanagaretnam, Kiridaran and Lobo, Gerald J. and Terzani, Simone, The Influence of Accounting Enforcement on Earnings Quality of Banks: Implications of Bank Regulation and the Global Financial Crisis (2018). Journal of Accounting and Public Policy, Vol. 37, No. 5, 2018, Available at SSRN: https://ssrn.com/abstract=3636254

Lorenzo Dal Maso (Contact Author)

affiliation not provided to SSRN

Kiridaran Kanagaretnam

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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

Simone Terzani

University of Perugia - Department of Economics

via Pascoli, 20
PG 06123 Perugia, 06123
Italy

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