Earnings versus capital ratios management: role of bank types and SFAS 114 |
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Authors: | Fatima Alali Bikki Jaggi |
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Institution: | (1) Department of Accounting, California State University –Fullerton, Fullerton, CA 92834, USA;(2) Department of Accounting, Business Ethics & Information Systems, Rutgers University, The State University of New Jersey, Piscataway, NJ 08854, USA |
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Abstract: | We document in this paper that large banks use Loan Loss Provisions (LLP) more than small banks to manage reported earnings,
but we find no significant difference in the use of LLP to manage capital ratios between large and small banks. Additionally,
we document that banks with high risk asset portfolios use more LLP to manage reported earnings as well as capital ratios
compared to the banks with low risk asset portfolios. Our findings also show that SFAS 114 has a moderating effect on the
use of LLP to manage reported earnings, especially by large banks, but there is no conclusive evidence on the impact of SFAS
114 to manage capital ratios. Furthermore, the findings show that there has been significantly more earnings management during
the 2007–2008 financial crisis compared to earlier periods. |
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