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

International Review of Economics and Finance, Forthcoming

Posted: 27 Dec 2005

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Chunlin Liu

University of Nevada, Reno - College of Business

S. Ghon Rhee

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

Multiple version iconThere are 2 versions of this paper

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 find that earnings management behavior by Japanese banks differ considerably 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 the first 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. Consistent with previous studies, we find that the Japanese banks significantly lowered their lending with increased provisions.

Keywords: Loan-Loss Provision, Security Gains, Earnings Management

JEL Classification: F34, F42, G28

Suggested Citation

Agarwal, Sumit and Chomsisengphet, Souphala and Liu, Chunlin and Rhee, S. Ghon, Earnings Management Behaviors Under Different Economic Environments: Evidence from Japanese Banks. Available at SSRN: https://ssrn.com/abstract=871430

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)

Chunlin Liu

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

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

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

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