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Prudential supervisors’ independence and income smoothing in European banks

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  • García Osma, Beatriz
  • Mora, Araceli
  • Porcuna-Enguix, Luis

Abstract

We investigate the role of prudential supervisors’ independence in affecting income smoothing behavior in European banks. Powerful national supervisors are predicted to influence the accounting practices of their supervised entities, shaping the properties of the accounting numbers they prepare. In particular, we study whether greater independence of powerful supervisors from the government and from the industry is associated with lower income smoothing. We use the mandatory adoption of a single set of accounting standards in Europe as a shock to the influence of prudential supervisors over national banks’ accounting practice. Our results confirm that political and industry independence of the supervisor are important determinants of income smoothing. This suggests that independence of prudential supervisors is a desirable governance characteristic, with positive impacts on financial transparency.

Suggested Citation

  • García Osma, Beatriz & Mora, Araceli & Porcuna-Enguix, Luis, 2019. "Prudential supervisors’ independence and income smoothing in European banks," Journal of Banking & Finance, Elsevier, vol. 102(C), pages 156-176.
  • Handle: RePEc:eee:jbfina:v:102:y:2019:i:c:p:156-176
    DOI: 10.1016/j.jbankfin.2019.03.001
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    Keywords

    Income smoothing; Prudential supervisors; Independent supervisors; European banking industry; IAS 39; Single supervisory mechanism;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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