THE ROLE OF LOAN LOSS PROVISIONS IN EARNINGS MANAGEMENT, CAPITAL MANAGEMENT, AND SIGNALING: THE SPANISH EXPERIENCE

Asokan Anandarajan, Iftekhar Hasan, Ana Lozano-Vivas

Research output: Chapter in Book/Report/Conference proceedingChapter

34 Scopus citations

Abstract

While much research has been conducted in the United States on the use of loan loss provisions (LLPs) as a mechanism for managing earnings, managing capital, and as a tool for signaling future earnings strategies, there is a paucity of research in Europe. In this research, we replicate methodology used by Ahmed, Takeda and Thomas (1998) and examine the relative importance of key factors affecting the LLP decisions of Spanish depository institutions. Among others, we focus on the role of organizational structure. We specifically examine if and how LLPs are used prior to and after the implementation of capital adequacy regulations in the Spanish depository industry in 1992. Our results indicate that while LLPs were not used as a tool for managing capital after the new regulation came into effect, banks have now adopted a more aggressive earnings management strategy. This appears to be because the capital adequacy regulation of 1992 removed any capital constraint that hitherto acted as a disincentive to aggressive earnings management. Commercial banks appeared to adopt a more aggressive earnings management as well as capital management strategy than savings banks in the post regulatory era. Finally, we did not find evidence that LLPs were used as a signaling tool by Spanish banks to portray their intentions about future earnings.

Original languageEnglish (US)
Title of host publicationAdvances in International Accounting
Pages45-65
Number of pages21
Volume16
DOIs
StatePublished - Dec 1 2003

Publication series

NameAdvances in International Accounting
Volume16
ISSN (Print)0897-3660

All Science Journal Classification (ASJC) codes

  • Economics, Econometrics and Finance (miscellaneous)

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