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Does Earnings Management Affect Banks’ Cost of Funding? An Empirical Investigation Across an European Sample

In: Bank Funding, Financial Instruments and Decision-Making in the Banking Industry

Author

Listed:
  • Federico Beltrame

    (University of Udine)

  • Daniele Previtali

    (Luiss Guido Carli University)

  • Alex Sclip

    (University of Udine)

Abstract

Loan loss provisions which are the main components, by which managers handle earnings, are used discretionally to smooth earnings, manage capital requirements and increase the stock market valuation. However managers’ discretionary behavior might have a negative effect, since hidden risks can alter the risk profile of a bank. In this paper, we investigate whether such a discretionary component of provisioning has an impact on the cost of funding. We use panel data regression on a sample of European banks, during the period 2005–2013. Our finding suggests that the discretionary use of provisioning affects the cost of funding, due to the increase of the overall risk to the bank.

Suggested Citation

  • Federico Beltrame & Daniele Previtali & Alex Sclip, 2016. "Does Earnings Management Affect Banks’ Cost of Funding? An Empirical Investigation Across an European Sample," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Santiago Carbó Valverde & Pedro Jesús Cuadros Solas & Francisco Rodríguez Fernández (ed.), Bank Funding, Financial Instruments and Decision-Making in the Banking Industry, chapter 2, pages 7-30, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-3-319-30701-5_2
    DOI: 10.1007/978-3-319-30701-5_2
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