Other Articles by Authors

Amina Zgarni
Hassouna Fedhila

Authors and WSEAS

Amina Zgarni
Hassouna Fedhila

WSEAS Transactions on Business and Economics

Print ISSN: 1109-9526
E-ISSN: 2224-2899

Volume 16, 2019

Notice: As of 2014 and for the forthcoming years, the publication frequency/periodicity of WSEAS Journals is adapted to the 'continuously updated' model. What this means is that instead of being separated into issues, new papers will be added on a continuous basis, allowing a more regular flow and shorter publication times. The papers will appear in reverse order, therefore the most recent one will be on top.

Volume 16, 2019

Discretionary Loan Loss Provisions, Earnings Management and Capital Management in Banks

AUTHORS: Amina Zgarni, Hassouna Fedhila

Download as PDF

ABSTRACT: The two past decades have been marked by a multitude of financial scandals (the Enron failure, WorldCom. etc.) mainly caused by the practices of earning management that have challenged the financial reporting quality disclosed. The purpose of this research is to study the determinants of discretionary loan loss provisions in banks. To achieve this objective, we selected a sample of the main Tunisian banks over the period from 2001 to 2014. The estimation results shows that the banks are opting for earnings management practices through the discretionary loan loss provisions in order to align with international standards, in particular with respect to regulatory capital. In opposition, we found a non-significant relationship between earnings before taxes and provisions and discretionary provisions.

KEYWORDS: Discretionary loan loss provisions, earnings management, capital management, JEL Codes: G14, M4, M41


[1] Abou El Sood, H., (2012), Loan loss provisioning and income smoothing in US banks pre andpost the financial crisis, International Review of Financial Analysis, Vol. 25, p.p. 64- 72.https://doi.org/10.1016/j.irfa.2012.06.007

[2] Ahmad I , Abdullah H , Bujang I (2014), Loan Loss Provisions And Macroeconomic Factors: The Case Of Malaysian Commercial Banks”, Full Paper Proceeding Multidisciplinary Studies Full Paper Proceeding Gtar, Vol. 1, 73- 86. www.globalilluminators.org

[3] Ahmed, A., C. Takeda, et S. Thomas., (1999),“Bank loan loss provisions: A reexamination of capital management, earnings management, and signaling effects”. Journal of Accounting and Economics 28(1): 1 – 25. http://dx.doi.org/10.2139/ssrn.84188

[4] Anandarajan, A., Hasan, I., & Vivas, A. L. (2005). “Loan loss provision decisions: An empirical analysis of the Spanish depository institutions”. Journal of International Accounting, Auditing and Taxation, 14(1), pp 55-77. Doi: 10.1016/j.intaccaudtax.2005.01.004

[5] Anandarajan, A., Hasan, I., & McCarthy, C. (2007). Use of loan loss provisions for capital, earnings management and signalling by Australian banks. Accounting & Finance, 47(3), 357e 379.https://doi.org/10.1111/j.1467- 629X.2007.00220.x

[6] Anandarajan, A.,Leventis, S., DimitropoulosP,E.(2011),“Loan Loss Provisions, Earnings Management and Capital Management under IFRS: The Case of EU Commercial Banks” working paper, pp 47. http://hdl.handle.net/10.1007/s10693-010- 0096-1

[7] Baccouche S., Hadriche M., Omri A., ( 2013), “ The Impact Of Audit Committee MultipleDirectorships On Earnings Management: Evidence From France” The Journal of Applied Business Research, Volume 29, Number 5 , pp 1333-1342. https://doi.org/10.19030/jabr.v29i5.8017

[8] Beatty, A., Chamberlain, S., Magliolo, J., (1995). Managing financial reports of commercialbanks: The influence of taxes, regulatory capital, and earnings. Journal of AccountingResearch 33, 231- 261.http://www.jstor.org/stable/pdf/2491487.pd f

[9] Beatty A, Bin Ke et Petroni K R (2002) “Earning Management to Avoid Earning Declines Across Publicly And Privately Held Banks” the accounting review 24 pages. https://doi.org/10.2308/accr.2002.77.3.547

[10] Beck, N. and Katz, J. (1996) “Nuisance vs. substance: specifying and estimating timeseries cross-section models”, Political Analysis, Vol. 6, pp.1– 34.https://doi.org/10.1093/pan/6.1.1

[11] Ben Othman, H. and Mersni, H. (2014), “The use of discretionary loan loss provisions by Islamic banks and conventional banks in the Middle East region: A comparative study”, Studies inEconomics and Finance, Vol., 2, N°1, p.p. 106-128.. DOI 10.1108 / SEF-02-2013- 0017

[12] Ben Othman H et, Mersni. H (2016),'The impact of corporate governance mechanisms on earnings management in Islamic banks in the Middle East region', Journal of Islamic Accounting and Business Research, Vol. 7 N° 4 pp. 318-348. https://doi.org/10.1108/JIABR11-2014-0039

[13] Bhat, V. N. (1996). Banks and Income Smoothing: An Empirical Analysis. Applied Financial EconomicsVolume 6, 1996 - Issue 6 pp 505-510 .https://doi.org/10.1080/096031096333953

[14] Cornett, M.M., McNutt, J.J., Tehranian, H. (2006) ‘Corporate governance and earnings management at large U.S. bank holding companies’, Journal of Corporate Governance, 15, 4, pp. 412-430. doi:10.1016/j.jcorpfin.2009.04.003

[15] Collins, J., Shackelford D., et Wahlen, J. (1995). “Bank differences in the coordination of regulatory capital, earnings and taxes”. Journal of Accounting Research, 33: 263–292. DOI: 10.2307/2491488

[16] Cornett, M.M., McNutt, J.J., Tehranian, H. (2009) ‘Corporate governance and earnings management at large U.S. bank holding companies’, Journal of Corporate Governance, 15, 4, pp. 412-430. doi:10.1016/j.jcorpfin.2009.04.003

[17] Cheng P., and Coulombe D., (1993), “Volontary Income- Increasing Accounting Changes”, Contemporary Accounting Research, Volume 10, Issue1, pp 247-272. https://doi.org/10.1111/j.1911 3846.1993.tb00392.x

[18] Collins, J., Shackelford D., et Wahlen, J. (1995). “Bank differences in the coordination of regulatory capital, earnings and taxes”. Journal of Accounting Research, 33: 263–292. https://www.jstor.org/stable/2491488

[19] Cornett, M.M., McNutt, J.J., Tehranian, H. (2006) ‘Earnings management at large U.S. bank holding companies’, Working paper. Available at SSRN: http://papers.ssrn.com/abstract_id=886115

[20] Dantas J. A., Mederios O R., Lustosa P. R., (2012), “The role of economic variables and credit portfolio attributes for estimating discretionary loan loss provisions in Brazilian banks”, Brazilian Business Review., pp 65-90

[21] Fekri M. A., Saiti; B., Abdul Razak SH H. and Ariff M., (2015) “The Impact of Efficiency on Discretionary Loans/Finance Loss Provision: A Comparative Study of Islamic and Conventional Banks” Borsa istanbul Review., 24 pages. Doi : 10.1016/j.bir.2015.06.002

[22] Fernando W.D.I.1 et Ekanayake E.M.N.N 5 (2015) “Do Commercial Banks Use Loan Loss Provisions to Smooth Their Income? Empirical Evidence from Sri Lankan Commercial Banks “, Journal of Finance and Bank Management. pp 167- 179. DOI: 10.15640/jfbm.v3n1a15

[23] Holthausen R. W, (1990). “Accounting Method Choice: Opportunistic Behavior, Efficient Contracting and InformationPerspectives”, Journal of Accounting and Economics 12, p. 207-218. https://doi.org/10.1016/0165- 4101(90)90047-8

[24] Ittonen K., Tronnes Per C. Vähämaa S., (2015) “Do former auditors on the audit committee constrain earnings management? Evidence from the banking industry” Working papar

[25] Kanagaretnam K. (2004), Earnings Management to Reduce Earnings Variability: Evidence from Bank Loan Loss Provisions, Review of Accounting and Finance. pp 128- 148.

[26] Kwak W., Lee H-Y., Susan W. Eldridge (2009), “Earnings Management by Japanese Bank Managers Using Discretionary Loan Loss Provisions”, Review of Pacific Basin Financial Markets and Policies Vol. 12, No. 1 (2009) 1– 26.

[27] Kim, M. S., & Kross, W. (1998). The impact of the 1989 change in bank capital standards on loan loss provisions and loan write-offs. Journal of Accounting and Economics, 25(1), 69e 99.

[28] Liu J, Dong X, Hu B (2012) “Research on the Relationship of Commercial Bank’s Loan Loss Provision and Earning Management and Capital Management” Journal of Service Science and Management, 2012, 5, 171-179 . Doi : 10.4236/jssm.2012.52021

[29] Lobo GJ, Yang DH (2001),“Bank managers’ heterogeneous decisions on discretionary loan loss provisions”. Review of Quantitative Finance and Accounting 16:223-250. https://doi.org/10.1023/A:1011284303517arch, 26 (3): 1-31.

[30] Misman. F. N. and W. Ahmad. 2011. Loan loss provision: evidence from Malaysian Islamic and conventional banks. International Review of Business Research Papers 7(4 ): 94-103

[31] Moyer, S., (1990). Capital adequacy ratio regulations and accounting choices in commercialbanks. Journal of Accounting and Economics 13, 123–154.

[32] Niswander. F., and Swanson. E.P., (2000), “loan, security, and dividend choices by individual (unconsolidated)public and private commercial banks”, journal of accounting and public policy, volume 19, issue 3, pp 201- 235.Doi : 10.1016/S0278-4254(00)00013-2

[33] Olson, D., and Zoubi, T. A. (2014). “The determinants of loan loss and allowances for MENA banks”. Journal of Islamic Accounting and Business Research, 5(1), 98-120. et al. (2016). Doi: 10.1108/JIABR-07-2013-0027

[34] Ozili, P. K. (2015). “Loan loss provisioning, income smoothing, signalling, capital management and procyclicality: Does IFRS matter? Empirical evidence from Nigeria”. Mediterranean Journal of Social Science, 6(2), 224 e 232.

[35] Schipper, K. 1989. “Commentary on earnings management”. Accounting Horizons 3(4): 91- 102. DOI: 10.12691/jfa-3-3-3

[36] Scholes, M, Wilson, P., Wolfson, M., 1990. Tax planning, regulatory capital planning, andfinancial reporting strategy for commercial banks. Review of Financial Studies 3, 625-650.

[37] Shayan-Nia M., SinnaduraiP., MohdSanusi.Z.,, , HermawanA.N.A ., (2017),“How efficient ownership structure monitors income manipulation? Evidence of real earnings management among Malaysian firms”, Research in International Business and Finance, Volume 41, October 2017, pp 54–66

[38] Shrieves, R.E. et Dahl, D. (2003), “Discretionary Accounting and the behaviour of Japanese banks under financial distress” Journal of Banking and Finance, Vol. 27, pp. 1219-1243.

[39] Taktak Boulila N., Mbarki I., (2014),'Board characteristics, external auditing quality and earnings management: Evidence from the Tunisian banks', Journal of Accounting in Emerging Economies, Vol. 4 Iss 1 pp. 79-96

[40] Taktak Boulila N. et Elleuch S, H. (2010) « La Gestion Des Résultats Dans Les Banques Tunisiennes : Vers Une Gestion Réelle » La place de la dimension européenne dans la Comptabilité Contrôle Audit, Strasbourg, France. pp28.

[41] Taktak Boulila N., Zouari S., et Boudriga A., (2010b). « Do Islamic banks use loan loss provisions to smooth their results?”Journal of Islamic Accounting andBusiness Research, 1(2), 114–127.

[42] Zgarni. A., Fedhila . H., & El Gaied . M., (2018). Audit Committee and Discretionary Loan Loss Provisions in Tunisian Commercial Banks. International Journal of Economics and Financial Issues, 8(2), 85-93. http: www.econjournals.com

WSEAS Transactions on Business and Economics, ISSN / E-ISSN: 1109-9526 / 2224-2899, Volume 16, 2019, Art. #47, pp. 424-432

Copyright Β© 2018 Author(s) retain the copyright of this article. This article is published under the terms of the Creative Commons Attribution License 4.0