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The effect of leverage and liquidity on earnings and capital management: Evidence from U.S. commercial banks

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  • Gombola, Michael J.
  • Ho, Amy Yueh-Fang
  • Huang, Chin-Chuan

Abstract

Prior research shows that firms can manage earnings aggressively through making accounting choices affecting discretionary current accruals surrounding equity offerings as a means of smoothing earnings over time. Some evidence indicates that aggressive earnings management carries over to aggressive management of capital structure in the form of higher leverage and aggressive management of working capital in the form of lower liquidity. Earnings management by banks is achieved instead by managing accruals dealing with payment behavior on loans: the loan loss provision and net charge-offs. A regulatory change expressed in the Basel III accords has tightened requirements on leverage and liquidity and could have affected earnings and capital management.

Suggested Citation

  • Gombola, Michael J. & Ho, Amy Yueh-Fang & Huang, Chin-Chuan, 2016. "The effect of leverage and liquidity on earnings and capital management: Evidence from U.S. commercial banks," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 35-58.
    • Handle: RePEc:eee:reveco:v:43:y:2016:i:c:p:35-58
    DOI: 10.1016/j.iref.2015.10.030
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    4. Aristei, David & Gallo, Manuela, 2019. "Loan loss provisioning by Italian banks: Managerial discretion, relationship banking, functional distance and bank risk," International Review of Economics & Finance, Elsevier, vol. 60(C), pages 238-256.
    5. Lacina, Michael J. & Li, Shihong & Yi, Lin, 2020. "Do bank managers use securitization gains to smooth earnings in the post- FAS 166/167 period?," Advances in accounting, Elsevier, vol. 48(C).
    6. Lazzem, Safa & Jilani, Faouzi, 2018. "The impact of leverage on accrual-based earnings management: The case of listed French firms," Research in International Business and Finance, Elsevier, vol. 44(C), pages 350-358.
    7. Boachie, Christopher & Mensah, Emmanuel, 2022. "The effect of earnings management on firm performance: The moderating role of corporate governance quality," International Review of Financial Analysis, Elsevier, vol. 83(C).
    8. Shahzad, Farrukh & Ahmad, Munir & Fareed, Zeeshan & Wang, Zhenkun, 2022. "Innovation decisions through firm life cycle: A new evidence from emerging markets," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 51-67.
    9. Sunday Olugboyega KAJOLA & Adeniyi ALAO & Wasiu Abiodun SANYAOLU & Olalekan Jubril OJURONGBE, 2019. "Effect Of Liquidity And Leverage On Financial Performance Of Nigerian Listed Consumer Goods Firms," Contemporary Economy Journal, Constantin Brancoveanu University, vol. 4(3), pages 91-102.

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    More about this item

    Keywords

    Leverage; Liquidity; Abnormal loan loss provision; Earnings management; Capital management;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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