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Discretionary Actions in Measuring Derivatives as a Mechanism for Earnings Management in Banks

Author

Listed:
  • José Alves Dantas

    (Universidade de Brasília - UnB)

  • Fernando Caio Galdi

    (Fucape Business School)

  • Lúcio Rodrigues Capelletto

    (Universidade de Brasília (UnB))

  • Otávio Ribeiro Medeiros

    (Universidade de Brasília (UnB))

Abstract

The paper has the purpose of identifying whether Brazilian banks use discretionary accounting choices when recognizing and measuring derivatives for practicing earnings management and which are the determinants of this practice. Using a two-stage model to segregate the discretionary part in the estimated fair value of derivatives and based on information from the third quarter of 2002 to the fourth quarter of 2010, the empirical results confirm the reversing nature of these discretionary actions, show that banks utilize this type of action as a mechanism for earnings smoothing, and disclose that this practice is more common in private institutions, smaller in asset size and with lower capitalization. The evidence advances with respect to the previous literature, which have identified the use of derivatives in practicing earnings management by banks, but have not associated this practice to discretionary actions by the management.

Suggested Citation

  • José Alves Dantas & Fernando Caio Galdi & Lúcio Rodrigues Capelletto & Otávio Ribeiro Medeiros, 2013. "Discretionary Actions in Measuring Derivatives as a Mechanism for Earnings Management in Banks," Brazilian Review of Finance, Brazilian Society of Finance, vol. 11(1), pages 17-48.
    • Handle: RePEc:brf:journl:v:11:y:2013:i:1:p:17-48
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    More about this item

    Keywords

    Derivatives; Banks; Discretionary; Earnings Management; Fair Value.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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