Bank Earnings Management in Emerging Market Economies: The Case of Mexico

In the mid-late 1990s, developing countries in several parts of the world experienced severe currency devaluations that were accompanied by deep economic downturns. For some regions, international financial organizations have documented that deficient financial reporting standards and practices contributed to the onset and magnitude of the crises by understating banks’ problem loans and capital adequacy problems. However, little research has been conducted concerning the role of financial reporting in the post-devaluation reconstruction of financial systems. As such, this paper examines the role of financial reporting in the post-1994 devaluation restructuring of the Mexican banking system. Emphasis is placed on examining whether the country's three largest banks delayed the recognition of loan losses in the late 1990s. The results provide evidence that banks took advantage of weaknesses in financial reporting standards to delay the recognition of loan losses.