Earnings Management Behaviors Under Different Economic Environments: Evidence from Japanese Banks

31 Pages Posted: 26 Jan 2005

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

S. Ghon Rhee

University of Hawaii - Shidler College of Business; University of Hawaii - Department of Financial Economics and Institutions

Chunlin Liu

University of Nevada, Reno - College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 15, 2005

Abstract

This paper investigates Japanese banks' earnings management behavior under three distinct economic environments: (1) high-growth with asset price bubble economy (1985-1990); (2) stagnant growth with financial distress economy (1991-1996); and (3) severe recession with credit crunch economy (1997-1999). Using bank balance sheet information of 78 Japanese banks, we do not find that earnings management behavior by Japanese banks significantly differs across the three periods. Our results indicate that banks used security gains as a means to manage earnings throughout all three periods. We also find that banks used loan loss provisions to manage earnings; however, this behavior is only prevalent during two periods. Due to the fact that banks faced record-high non-performing loans during the latter severe recession period, banks on average may have been restrained from using loan loss provisions to smooth income and/or to replenish regulatory capital; instead, we detect that the Japanese banks lowered their lending.

Keywords: Loan-loss provision, security gains, earnings management; and regulatory capital

JEL Classification: F34, F42, G28

Suggested Citation

Agarwal, Sumit and Chomsisengphet, Souphala and Rhee, S. Ghon and Liu, Chunlin, Earnings Management Behaviors Under Different Economic Environments: Evidence from Japanese Banks (January 15, 2005). Available at SSRN: https://ssrn.com/abstract=654443 or http://dx.doi.org/10.2139/ssrn.654443

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Souphala Chomsisengphet (Contact Author)

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)

S. Ghon Rhee

University of Hawaii - Shidler College of Business ( email )

2404 Maile Way
C-304, FEI/CBA
Honolulu, HI 96822
United States

University of Hawaii - Department of Financial Economics and Institutions ( email )

United States

Chunlin Liu

University of Nevada, Reno - College of Business ( email )

University of Nevada, Reno
Reno, NV 89557-0016
United States

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