The impact of corporate governance on banks' earnings management

Loan loss provisions and realised fixed assets gains and losses are useful information for analysts and investors because they indicate a bank's sense of how stable its lending base and assets are. They are also used as forms of earnings management at banks as a higher level of loan loss provisions decrease earnings while a higher level of realised fixed assets gains and losses increase earnings. This study examines how corporate governance mechanisms affect earnings management at 25 publicly traded banks in Taiwan over the period of June 2003 to June 2018. The empirical results show that the discretionary use of loan loss provisions and realised fixed assets gains and losses play an important role in a bank's earnings management. In particular, we find that banks of financial holding companies prefer the discretionary use of loan loss provisions in earnings management that is not influenced by the power of CEOs but by the independent board and the board size. Besides, banks that do not belong to financial holding companies prefer the discretionary use of realised fixed assets gains and losses and their earnings performance are affected by the power of CEOs.