Earnings Management and Risk Valuation in the Banking Industry: Evidence from Loan Loss Provisions

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BADRI AHMAD; EBRAHIMNEJAD ALI; Tahmasebi Torshizi Ali

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Journal: JOURNAL OF MANAGEMENT AND ACCOUNTIN SCHOOL Year:2019 | Volume:15 | Issue:60 Page(s): 1-32

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Title

Earnings Management and Risk Valuation in the Banking Industry: Evidence from Loan Loss Provisions

Author(s)

BADRI AHMAD | EBRAHIMNEJAD ALI | Tahmasebi Torshizi Ali | Issue Writer Certificate

Keywords

BankQ2

Loan Loss ProvisionsQ1

RiskQ2

earning managementQ2

Abstract

An extensive literature examines managers’ incentives to smooth reported earnings using accruals in order to reduce price fluctuation of stocks in markets. Banks have additional incentives to engage in earnings management for a number of reasons, including tighter regulatory environment. They also have the ability to manage earnings using Loan Loss Provisions (LLP). This paper examines earnings management using accruals – in particular, LLP-as the main accrual item in financial reporting of Banks in the Iranian Banking industry from 2005 to 2016. From previous studies, we expect that for Banks with good (poor) current performance and expected poor (good) future performance, managers will save income for (borrow income from) the future by reducing (increasing) current income through LLP, especially discretionary LLP (DLLP). We also examine the effect of external financing, availability of other methods of earnings management like increasing (decreasing) non-operating income and capital requirements and also the relation of DLLP with Risk. Our results indicate that Bank managers do save earnings through DLLP in good times and borrow earnings using DLLP in bad times. We also find that Bank Risk is negatively associated with discretionary accruals.

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APA: Copy

BADRI, AHMAD, EBRAHIMNEJAD, ALI, & Tahmasebi Torshizi, Ali. (2019). Earnings Management and Risk Valuation in the Banking Industry: Evidence from Loan Loss Provisions. JOURNAL OF MANAGEMENT AND ACCOUNTIN SCHOOL, 15(60 ), 1-32. SID. https://sid.ir/paper/393941/en

Vancouver: Copy

BADRI AHMAD, EBRAHIMNEJAD ALI, Tahmasebi Torshizi Ali. Earnings Management and Risk Valuation in the Banking Industry: Evidence from Loan Loss Provisions. JOURNAL OF MANAGEMENT AND ACCOUNTIN SCHOOL[Internet]. 2019;15(60 ):1-32. Available from: https://sid.ir/paper/393941/en

IEEE: Copy

AHMAD BADRI, ALI EBRAHIMNEJAD, and Ali Tahmasebi Torshizi, “Earnings Management and Risk Valuation in the Banking Industry: Evidence from Loan Loss Provisions,” JOURNAL OF MANAGEMENT AND ACCOUNTIN SCHOOL, vol. 15, no. 60 , pp. 1–32, 2019, [Online]. Available: https://sid.ir/paper/393941/en

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