Ownership structure, earnings management and value relevance of loan loss provision components

PurposeThis study examines the effect of concentrated government ownership on the value relevance of the discretionary and non-discretionary components of loan loss provisions (LLP). While extant research has explored ownership characteristics in relation to income smoothing and the proportion of discretionary LLP, no study has investigated whether investors assign different values to LLP reported by firms with concentrated ownership characteristics.Design/methodology/approachThe study employs a firm-fixed effects panel regression approach to analyze income smoothing behavior and value relevance for banks, conditional on government ownership. The study incorporates various robustness checks, such as alternative LLP specifications, market-adjusted returns and alternate deflators, to validate the robustness of the results.FindingsThe findings show that banks with controlling government ownership use LLP to smoothen their income and their use of LLP for income smoothing differs from that of private banks. Additionally, controlling government ownership negatively influences the value relevance of LLP’s discretionary component. Our findings suggest that investors do not perceive the discretionary LLP as “good news” for all banks.Originality/valueTo the best of our knowledge, this study is the first unitary analysis of the relationship between concentrated government ownership and the value relevance of LLP components. The study also contributes to the existing literature by offering new insights into the role of concentrated government ownership in earnings management.