Earnings Management and Capital Management by Different Types of Banks Before and after SFAS No. 114
Posted: 2 Feb 2005
Date Written: December 2004
The study has three main objectives. First, it examines the differences in the banks' managers' behavior with respect to loan loss provisions of different types of banks. Second, it examines whether the level of capitalization, i.e. well/adequately capitalized and undercapitalized banks, will have an impact on managerial behavior of loan loss provisions determination. Third, it examines whether SFAS No. 114 modifies managerial loan loss provisions behavior. We define bank types on the basis of total assets as defined by regulatory agencies and define banks as well-, adequately- and under-capitalized as defined by FDICIA of 1991. Using a sample of U.S. commercial banks, we document evidence of earnings management and capital ratio management using loan loss provisions. We also show that the level of loan loss provisions depends on bank's type. Moreover, we show that both money center banks and regional banks use loan loss provisions to manage earnings before loan loss provisions and taxes and that community banks use loan loss provisions to manage total capital ratio. In addition, there is evidence that SFAS No. 114 have diminished managerial behavior with regard to earnings management and capital ratio management and that SFAS No. 114 has provided a closer link between level of loan loss provisions and the loan loss default variables.
Keywords: Commercial bank, loan loss provisions, earnings management, capital ratio management, SFAS No. 114
JEL Classification: M41, M43, M44, G21
Suggested Citation: Suggested Citation