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Impact of IAS 39 reclassification on income smoothing by European banks

Author

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  • Ozili, Peterson K

Abstract

The article examines the impact of the reclassification of IAS 39 on income smoothing using loan loss provisions among European banks. The author predicts that the strict recognition and re-classification requirements of IAS 139 reduced banks' ability to smooth income using bank securities and derivatives, motivating them to rely more on loan loss provisions to smooth income. The findings do not support the prediction for income smoothing through loan loss provisions. Also, there is no evidence for income smoothing in the pre- and post-IAS 39 reclassification period. The implication of the findings is that: (i) European banks did not use loan loss provisions to smooth income during the period examined, and rather rely on other accounting numbers to smooth income; (ii) the IASB’s strict disclosure regulation improved the reliability and informativeness of loan loss provision estimates among European banks during the period of analysis.

Suggested Citation

  • Ozili, Peterson K, 2019. "Impact of IAS 39 reclassification on income smoothing by European banks," MPRA Paper 97035, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:97035
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    File URL: https://mpra.ub.uni-muenchen.de/97035/1/MPRA_paper_97035.pdf
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    More about this item

    Keywords

    Earnings Management; Income Smoothing; Loan loss provisions; IFRS; IAS 39; Financial Crises; disclosure regulation; banks; European banks; real earnings management;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • 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
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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