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Non-linear Dynamics in Discretionary Accruals: An Analysis of Bank Loan-Loss Provisions

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  • Marina Balboa

    ()
    (Faculty of Economics)

  • Germán López-Espinosa

    ()
    (School of Economics and Business Administration, University of Navarra)

  • Antonio Rubia

    ()
    (Faculty of Economics)

Abstract

Several studies have characterized the relation between discretionary accruals and earnings before-taxes to test for the existence of earnings smoothing behaviors. In this paper, we argue that the characteristic response of accruals to earnings is not linear, as the literature has shown. Instead, it is likely to be driven by non-linear patterns since both the incentives to manipulate earnings and the practical way to do so depend, in part, on the relative size of earnings. Using a sample of 9,442 US banks in the period 1999-2008, this paper shows that bank managers tend to use provisions as a smoothing devise when earnings are substantial (“cookie-jar” strategies), engage in earnings-decreasing strategies when losses are relatively large (“big-bath” accounting) and, most of the time, use provisions as an earnings-increasing tool. Hence, it is shown that nonlinear specifications are more informative with regard to the different strategies employed to manipulate earnings.

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File URL: http://www.unav.es/facultad/econom/files/workingpapersmodule/@random50169a3d22927/1352896767_WP_UNAV_06_12.pdf
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Bibliographic Info

Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 06/12.

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Length: 34 pages
Date of creation: 14 Nov 2012
Date of revision:
Handle: RePEc:una:unccee:wp0612

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Web page: http://www.unav.es/facultad/econom

Related research

Keywords: Earnings management; Income smoothing; Multi-way cluster; Panel data; Threshold regression;

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