Capital and Earnings Management: Evidence from Alternative Banking Business Models |
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Authors: | Marwa Elnahass Marwan Izzeldin Gerald Steele |
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Affiliation: | 1. Department of Accounting and Finance, Newcastle University Business School, Newcastle NE14SE, UK;2. Lancaster University Management School, Lancaster University, UK |
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Abstract: | This paper examines whether institutional characteristics distinguishing Islamic from conventional banks lead to distinctive capital and earnings management behavior through the use of loan loss provisions. In our sample countries, the two banking sectors operate under different regulatory frameworks: conventional banks currently apply the “incurred” loan loss model until 2018 whereas Islamic banks mandatorily adopt an “expected” loan loss model. Our results provide significant evidence of capital and earnings management practices via loan loss provisions in conventional banks. This finding is more prominent for large and loss-generating banks. By contrast, Islamic banks tend not to use loan loss provisions in either capital or earnings management, irrespective of the bank's size, earnings profile, or the structure of their loan loss model. This difference may be attributed to the constrained business model of Islamic banking, strict governance, and ethical orientation. |
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Keywords: | LLP loan loss provisions I-LLM incurred loan loss model expected loan loss model C23 G01 G21 G28 L50 M4 IFRS Regulatory capital management Earnings management Expected loan losses Incurred loan losses |
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