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Institutional Ownership and Income Smoothing by Japanese Banks through Loan Loss Provisions

Author

Listed:
  • Wikil Kwak

    (College of Business Administration, University of Nebraska at Omaha, USA)

  • Ho-Young Lee

    (School of Business, Yonsei University, South Korea)

  • Vivek Mande

    (College of Business and Economics, California State University, Fullerton, USA)

Abstract

This paper examines the association between institutional ownership and income smoothing through bank loan loss provisions for a sample of Japanese banks during the period 1991–1999. We find that as the percentage of institutional ownership of banks increases, income smoothing via loan loss provisions increases. Additional tests show that there is a significant positive relationship between the extent of income smoothing and the percentage ownership of banks by domestic financial institutions and affiliated (keiretsu) institutions. Consistent with the idea that foreign institutional holders do not play an important role in the corporate governance of Japanese banks, we do not find a significant association between foreign institutional ownership and the extent of income smoothing. Our results imply that institutional owners may play a different role in monitoring income smoothing during the recessionary period in Japan from the normal economic periods studied in most prior studies.

Suggested Citation

  • Wikil Kwak & Ho-Young Lee & Vivek Mande, 2009. "Institutional Ownership and Income Smoothing by Japanese Banks through Loan Loss Provisions," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 12(02), pages 219-243.
    • Handle: RePEc:wsi:rpbfmp:v:12:y:2009:i:02:n:s0219091509001617
    DOI: 10.1142/S0219091509001617
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    References listed on IDEAS

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    1. Brewer, Elijah III & Genay, Hesna & Hunter, William Curt & Kaufman, George G., 2003. "The value of banking relationships during a financial crisis: Evidence from failures of Japanese banks," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 233-262, September.
    2. Mark M. Spiegel & Nobuyoshi Yamori, 2000. "The evolution of \"too-big-to-fail\" policy in Japan: evidence from market equity values," Pacific Basin Working Paper Series 00-01, Federal Reserve Bank of San Francisco.
    3. Spiegel, M.M. & Yamori, N., 2000. "The Evolution of Too-Big-Fail Policy in Japan: Evidence from Market Equity Values," Papers pb00-01, Economisch Institut voor het Midden en Kleinbedrijf-.
    4. Ingyu Chiou, 1999. "Daiwa bank's reputational crisis: valuation effects on bank-firm relationships," Proceedings 647, Federal Reserve Bank of Chicago.
    5. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
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    Cited by:

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    2. Abdullah Mamun & Md Didarul Alam & George Tannous, 2019. "Did the regulatory changes of 1999 and 2001 affect income smoothing behavior of US banks?," Review of Quantitative Finance and Accounting, Springer, vol. 52(4), pages 1011-1041, May.
    3. Doan, Anh-Tuan & Lin, Kun-Li & Doong, Shuh-Chyi, 2020. "State-controlled banks and income smoothing. Do politics matter?," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    4. Chwee Ming Tee & Angelina Seow Voon Yee & Aik Lee Chong, 2018. "Institutional Investors’ Monitoring and Stock Price Crash Risk: Evidence from Politically Connected Firms," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(04), pages 1-35, December.
    5. Emmanuel Mamatzakis & Bingrun Xu, 2021. "Does ownership structure affect performance? Evidence from Chinese mutual funds," Review of Quantitative Finance and Accounting, Springer, vol. 56(4), pages 1399-1435, May.
    6. Emre Kilic & Gerald Lobo & Tharindra Ranasinghe & Lin Yi, 2021. "Strategic usefulness of ignorance: evidence from income smoothing via retained interest of securitized loans," Review of Quantitative Finance and Accounting, Springer, vol. 56(1), pages 245-272, January.
    7. Ozili, Peterson Kitakogelu, 2021. "Bank earnings management using loan loss provisions: comparing the UK, France, South Africa and Egypt," MPRA Paper 108506, University Library of Munich, Germany.
    8. Chee Lim & David Ding & Charlie Charoenwong, 2013. "Non-audit fees, institutional monitoring, and audit quality," Review of Quantitative Finance and Accounting, Springer, vol. 41(2), pages 343-384, August.

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    More about this item

    Keywords

    Institutional ownership; income smoothing; loan loss provisions; Japanese banks;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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