Window dressing in the banking sector of an emerging economy: evidence from aggregate data

Purpose - This study aims to investigate window dressing as practiced by commercial banks in Kuwait, using monthly aggregate balance sheet data covering the period January 1993 to December 2017. Design/methodology/approach - This study applies the structural time series model to decompose an observed time series into unobserved components based on monthly data covering January 1993 to December 2017 on the consolidated balance sheet of commercial banks in Kuwait. Findings - The empirical results indicate that Kuwaiti commercial banks indulge in upward window dressing to boost size and liquidity. This kind of behaviour is indicated by a statistically significant rise in assets under the control of banks in December, followed by a statistically significant decline in January. The operation is funded by borrowing, leading to a December rise and a January fall in foreign and other liabilities, which are also under the control of commercial banks. Originality/value - This study uses a novel methodology to detect window dressing based on the seasonal behaviour of balance sheet items. This study suggests a unified framework for the motives, targets, types and consequences of window dressing and how they are related.