Loan loss provisions, earnings management and capital management under IFRS: the case of EU commercial banks

Stergios Leventis, Panagiotis E. Dimitropoulos, Asokan Anandarajan

Research output: Contribution to journalArticle

Abstract

Prior research has shown that loan loss provisions are primarily used as a tool for earnings management and capital management by listed banks. Effective 2005 all listed companies in the European Union (EU) are required to comply with International Financial Reporting Standards (IFRS). Adherence to IFRS, it is claimed, should enhance transparency of reporting practices relative to local General Accepted Accounting Principles (GAAP). The overall objective of this paper is to examine the impact of the implementation of IFRS on the use of loan loss provisions (LLPs) to manage earnings and capital. We use a sample of 91 EU listed commercial banks covering a period of 10 years (before and after
implementation of IFRS). Since early adopters may have different incentives and
motivations relative to those who adopt mandatorily, we dichotomize our sample into early and late adopters. Overall, we find that earnings management (using loan loss provisions) for both early and late adopters while significant over the estimation window is significantly reduced after implementation of IFRS. We also find that, for risky banks, earnings management behavior is more pronounced when compared to the less risky banks, but is significantly reduced in the post IFRS period. Capital management behavior by bank managers is not significant in both pre and post IFRS regimes. Overall, we conclude that the implementation of IFRS in the EU appears to have improved earnings quality by
mitigating the tendency of bank managers of listed commercial banks to engage in earnings management using loan loss provisions.
Original languageEnglish
Pages (from-to)103-122
Number of pages20
JournalJournal of Financial Services Research
Volume40
Issue number1-2
DOIs
Publication statusPublished - Oct 2011

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European Union
Capital management
International Financial Reporting Standards
Earnings management
Commercial banks
Loan loss provisions
Managers
Accounting principles
Transparency
Earnings quality
Listed companies
Incentives
Adherence

Bibliographical note

The final publication is available at link.springer.com

Keywords

  • earnings management
  • capital management
  • loan loss provisions
  • IFRS
  • European Union

Cite this

Leventis, Stergios ; Dimitropoulos, Panagiotis E. ; Anandarajan, Asokan. / Loan loss provisions, earnings management and capital management under IFRS : the case of EU commercial banks. In: Journal of Financial Services Research. 2011 ; Vol. 40, No. 1-2. pp. 103-122.
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Loan loss provisions, earnings management and capital management under IFRS : the case of EU commercial banks. / Leventis, Stergios; Dimitropoulos, Panagiotis E.; Anandarajan, Asokan.

In: Journal of Financial Services Research, Vol. 40, No. 1-2, 10.2011, p. 103-122.

Research output: Contribution to journalArticle

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